Like the oil industry, electricity in Mexico has been dominated by a state-owned company for a number of years. The Federal Electricity Commission (Comisión Federal de Electricidad, CFE) is the sole provider of transmission and distribution services and also controls all output, producing 70% of electricity on its own and sub-contracting the other 30% to private firms.
Energy reform will break the CFE’s monopoly by transferring control of the grid to a new, independent regulator, the National Centre of Energy Control (Centro Nacional de Control de Energía, Cenace), and by opening the electricity industry to unrestricted private investment. Increased competition and private involvement is meant to drive down electricity prices and improve efficiency, according to the government.
Room For Change
Today, there are only two ways for private companies to engage in electricity production without being under the auspices of the CFE: one is “self-supply” (a policy that permits a firm to generate electricity for its own consumption); while the other is for renewable energy operations with capacity of less than 30 MW. With the exception of these two conditions, a private company may enter the electricity market only if it receives an unsolicited request for service from the CFE. Once the reform is implemented, this will change. Private firms will be free to produce and commercialise electricity either by selling it directly to “qualified users”, entities with consumption of more than 5 MW; by entering into a contract with CFE; or by selling it to the grid. Under the terms of the energy reform, the Cenace will make a short-term market onto which any producer can sell electricity. Prices on the short-term market will be updated frequently in order to encourage pricing that will smooth demand volatility. The only area where the CFE will maintain its monopoly is in the market for “basic users”, entities with consumption of less than 5 MW, which includes households and small businesses.
Efficiency
In addition to allowing private electricity production, the reform will also enable private participation in transmission and operation of the grid, which may improve efficiency. The current grid suffers from extreme inefficiency in some regions, such as in Mexico City where there are energy losses of up to 30% in transmission. These inefficiencies, as well as the lack of competition, have contributed to driving up Mexico’s electricity prices to the point that they are a liability for Mexican industry. However, these factors are not the only issues. The shortage of natural gas in Mexico has contributed at least as much to raising costs.
Natural gas is the primary input used by Mexican electricity plants, but the country’s demand far outstrips supply. Inadequate pipeline networks are largely to blame. There is abundant, cheap natural gas available in Texas, but Mexican pipelines, which are owned and operated by Petróleos Mexicanos (Pemex), have capacity to import only about 1bn cu feet per day (cfd), a small portion of the country’s consumption of more than 6.5bn cfd. Pemex produces 4.6bn cfd but exports much of it. So, the gap in supply has to be made up with liquefied natural gas (LNG) imported by sea. This high-priced LNG, when added to the mix of inputs used by Mexican electricity plants, drives up costs.
Pipeline Dreams
The energy reform will transfer Pemex’s pipelines, which account for about 90% of national capacity, to a new system operator, the National Centre for Natural Gas Control, and open up opportunities for private investment in gas pipelines and transportation of hydrocarbons products. Fernando Calvillo Alvarez, president and CEO of Fermaca, a natural gas service supplier, told OBG, “Our estimate is that Mexico will need $10bn in capital investments in gas infrastructure in the next 10 years.” This will include private projects as well as new pipelines built by CFE and Pemex, such as the Los Ramones pipelines that will have a capacity of 2bn cfd when they open in 2015. While such initiatives will help address the natural gas shortage, more projects will be needed as demand for natural gas grows. Between 2012 and 2013, consumption rose 10% and is expected to continue rising.
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