In 2013, the Mexican government enacted its Energy reform law that should for ever, change the face of the country’s energy markets. Strictly speaking, the process has been a real success as the markets now prepare to take over the country’s growth away from the regulated monopolies that were CFE (electricity) and PEMEX (oil and gas) and bring Mexico to cutting edge of energy sector from a mid-century (corporatist) system.
In truth, Mexico no longer had the means of its expansion. State monopolies were at some level extremely efficient, but at others inefficient. These firms were long used as means of providing sinecures to the party faithful, they had bloated administrations that were too slow to changes in the demand/supply matrix.
Moreover, as Mexico itself changes its power providers were poorly equipped to meet the country’s growing (and changing patterns) of energy demand. At the same time, the country made a commitment to reduce its carbon footprint via the introduction of more green power solutions (wind, solar, hydro, thermal).
As luck would have it, Mexico’s decision to head into the green energy segment could not be better timed. As the installation costs of renewable energy (in particular wind and solar) kept dropping. Both sectors saw massive reduction – in 2009 the cost of a watt of power for 1 hour via solar was more than $0.15, today its near $0.015 – a 10-fold reduction, and if the market (and it seems to be the case) can provide reasonably priced storage solutions then it may well displace a huge percentage of the demand from classic forms of electricity production. In fact, we are already at a point where coal is now matched with the cost of solar…
On the oil and gas front, the facts are that Pemex was poorly positioned to become a primary contractor in the deep-water oil and gas exploration and exploitation. In addition to not having the skills necessary, the company was reeling from subsidies domestic gasoline prices, high dividend payments to the Mexican Federal government, lower oil prices, inefficient operations and massive internal problems. In 2016 this all came to a head as PEMEX became unable to meet its massive debt obligations, and had to be rescued by the government.
Things have not changed at Pemex, most of the old systems are still in place, they did walk away (probably to the great relief internally) from deepwater operations, and the firm is slowly trying to rebuild its reputation with suppliers – but it’s a difficult road ahead. The country needs more gas pipelines and better management of its resources.
Even without Deepwater operations, PEMEX faces many serious challenges – replacing the country’s aging refineries is a pressing issue, increasing its ports ability to handle different types of molecules (sometimes having to reverse the mission of the port -- from importing to exporting). The team now heading the company has many years of challenges ahead of itself.
As a market participant, our interests lie in two aspects – first and foremost is trading this new exciting market, Mexico is maybe not the world’s largest economy, but it is the largest economy that has decided to completely open its energy market (with some exceptions). Secondly what kind of systems are available so that the market can function.
However, part of the problem for this new market for while legislation has been passed to allow market system to be in place, but those in charge of the “market aspect” have little understanding of what all this means in terms of application. As an exercise with the regulator, we discussed what size the market would have, and in an informal conversation we discussed that there would be more than 100,000 markets each day – we were taken to task for that, but we showed them, via simple math what we meant. Mexico’s electricity market will be nodal (it’s a feature, not a bug) with approximately 2,500 nodes (those who know math understand where this is going). There are 24 hours in a day, and in Mexico, electricity is sold in tranches of 15 minutes (again a feature, not a bug). Simple math tells you that every node has a price (bid/ask/volume) and that for every 15 minutes of the day, the math is 2.500x24x4 with the grand total if 240,000 prices. This is market data, most of this stuff will be inactive or operating under a long-term supply contract, still if only 1,500 nodes are price points the number of “daily markets” is still 140,000. Moreover, every second almost all main systems report their condition (volume and availability) and this data should be included into the market (no point in pricing between two nodes if the link between the two is operating at 100%...
Finally, and this is the kicker all this must be bulletproof form hackers and other groups that would want to disrupt Mexico’s power system. The market for electricity in Mexico should be fully opened by the end of 2018 – only 10 months away. As far as we know, there are many missing features here that will stop the market from functioning. I want to be very clear here, the regulators (CRE, CENACE, and CFE) have worked hard to make the system function but there are still some very important holes in the project – moreover this is an area that is less comfortable for the regulators since they don’t really understand the role of markets.
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