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The reform of the Mexican electricity sector
Enrique Ochoa Reza
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eBook - ePub
The reform of the Mexican electricity sector
Enrique Ochoa Reza
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About This Book
The electricity sector is one of the most important industries in the country. Based on that, and due to advances in this area around the world it was necessary to enact an energy reform initiative to establish a competitive environment, encourage renewable energy, and to increase the quality of electricity service for the Mexican people. These changes haver resulted in the participation of the private sector, rate reductions, better generation of clean energy, the development of gas pipeline infrastructure, the modernization of power plants, and the expansion of power transmission lines around the country. In this book, written by Enrique Ochoa Reza, current Chief Executive Officer of the Federal Electricity Commission, he provides an account of the challenges that the country faced before the energy reform, the change in the legal framework this reform has produced, and the benefits and transformation that have taken place since its implementation. This essay offers a unique opportunity to understand the importance and need for energy reform of this dimension for Mexico.
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1. Introduction
Consolidation of the energy sector
The Constitutional Reform on energy and its secondary legislation represent a vital step towards consolidating a modern and competitive energy sector. Through these initiatives, the ownership of the Nation over the subsoil resources is maintained, while opening opportunities for these resources to become an engine of economic growth and social development for the Mexicans of today and tomorrow.
The debate and media attention surrounding the Energy Reform have focused on the hydrocarbon sector. However, this Reform also involves major changes to the national electricity sector; hence, the aim of this book is to explain the Energy Reform in the electricity industry.
Throughout these pages, the need to launch a full and inclusive electricity sector reform is explained, the previous legal framework is discussed, and the reforms that will help consolidate a productive, competitive and efficient electricity industry are detailed.
The approval and promulgation of the Constitutional Reform on Energy and its secondary legislation marked the beginning of a new chapter in the history of both the electricity sector and Comision Federal de Electricidad
(CFE, Federal Electricity Commission). This is a new era of responsibility, transparency, and sustainable growth for the benefit of the Mexican people.
Reforms to the Constitution
With the reform of Articles 25, 27 and 28 of the Constitution of the United Mexican States, the Nationās ownership of subsurface resources is reaffirmed and the planning and control of the National Electric System (SEN, its acronym in Spanish), as well as the transmission and distribution of electricity, remain under the Stateās responsibility. At the same time, these legal provisions propose opening up the sector to private participation in the generation and commercialization of electricity, as well as the ability to enter into contracts to build transmission and distribution infrastructure.
New Legal Framework
In addition, the Mexican Congress enacted nine new secondary laws on energy and amended twelve more. Four of the new laws address the electricity sector directly: the Electricity Industry Law, the Geothermal Energy Act, Comision Federal de Electricidad Law, and the Coordinated Regulators on Energy Law.
With this legal framework, a new electricity model with multiple generators, universal access, and more efficient operation of transmission and distribution grids is established.
Manzanillo Thermal Power Plant.
Source: CFE file, 2015.
Five stages of the electricity system
The electricity value chain in Mexico, as elsewhere in the world, is made up of at least five stages. The first is the generation of electrical energy from fuels or renewable sources to meet the industrial, commercial, and domestic demand. The second stage is the dispatch of electricity. This is done through a computerized ordering center where electrical energy supply and demand are matched to meet the demands of different consumption centers, such as cities and towns.
The third stage is the transmission of electricity. This occurs when the great towers and cables that are on the roads or in the fields of the country carry high-voltage electricity, joining the points of generation to the points of future consumption. The fourth stage is distribution. Electricity is carried through the poles and wires in cities or towns to bring energy to businesses and households. Finally, the fifth step is marketing; that is, the sale and collection of electricity that has been generated, dispatched, transmitted, and distributed. These are the five stages of the national electricity sector and the Energy Reform proposes changes throughout all of them.
In implementing this reform, entry barriers are removed and competition is strengthened. The goal is for the private and public sectors to compete with each other to generate electricity and sell it on the Wholesale Electricity Market.
CENACEās functions
As for the electricity dispatch, the National Center for Energy Control (CENACE, its acronym in Spanish) is independent of CFE to efficiently and competitively operate the SEN as a spot market (real time). To do so implies a simple but powerful mandate: to dispatch first the lowest-cost energy. It also has a responsibility to ensure open and fair access to transmission and distribution networks for all participants. Thus, with clear and transparent rules, it should promote the generation of electrical energy at competitive prices for the benefit of users.
Modernization
The processes of electricity transmission and distribution remain strategic activities of the State, but the possibility to build the necessary infrastructure through contracts with the private sector has been established. The goal is for the private, national, and international sectors to contribute with their expertise and knowledge to the modernization of transmission and distribution networks, in order to reduce costs and energy losses.
Competitive prices
With the opening of electricity retailing to competition, which is now possible because of the Energy Reform, it is also anticipated that consumers will benefit from competitive prices. As a result, qualified users (those with a demand of more than 1 MW from August 2016) may freely agree to prices with generating companies, while the rest of the users (basic service users) will continue to receive their service from CFE, but in a competitive environment focused on reducing costs.
The Energy Regulatory Commission (CRE, its acronym in Spanish) becomes responsible for setting user fees for basic supply, thus greater efficiency will be reflected in improved electricity costs for industries, businesses, and Mexican households.
New tools
Because CFE can compete in this new model of the electricity market, the Energy Reform and its secondary legislation will provide it with the necessary tools to meet the challenges of a dynamic and increasingly complex industry. In addition, they open up opportunities for CFEās modernization, in order for it to be a profitable, efficient, and productive enterprise for the benefit of present and future generations of Mexicans.
The electricity sector
The first chapter of this book is aimed at answering a common question: why was the electricity sector reform necessary? The objective of the section is to describe the conditions and challenges faced in this sector, which resulted in high costs for the population and problems in service quality in recent years. In this chapter, the reader can appreciate the urgency of a profound change in the electricity field and the challenges that the Energy Reform seeks to overcome.
We will recount the two major challenges facing the electricity sector in particular: high generation costs and polluting emissions, as well as high levels of electricity technical and non-technical losses in the transmission and distribution networks.
Previous legal framework
The second chapter deals with the legal framework on energy that existed in the country before the Energy Reform. The impediments to growth and limited investment in the sector are emphasized. The reader will have information which illustrates the need for a modern legal framework that encourages the creation of a competitive and efficient electricity sector in the country.
In the third chapter, the main changes promoted by the Energy Reform intended to reduce costs and raise the quality of electricity service received by households, businesses, and industry in Mexico will be described.
Implications of reform
The fourth chapter accounts for the implications of the Reform for CFE. The purpose is to explain the changes that impact the company, as well as detail the tools it now has to raise productivity and efficiency, so that it can compete on equal terms with other industry participants.
Finally, the conclusion serves as an account of the most significant changes that this Reform represents for both the electricity sector and the country.
In summary, readers should be able to better understand key features of the Energy Reform in the electricity sector, why the reform was necessary, and what the challenges and opportunities for CFE are in the new environment. Likewise, readers will understand the initial benefits that are already being enjoyed and the expected future benefits for Mexican citizens as a result of the reform implementation: electricity service with lower costs and higher quality, and processes that are friendlier to the environment.
2. Why was a reform of the electricity sector necessary?
Electricity service demand
June 12th, 2014, at 15:41 hours, marked the day of peak electricity demand in the history of our country. On that day, the opening match of the Soccer World Cup in Brazil took place, and the time was just four minutes before halftime of the first game. Demand surged to 40,000 megawatts (MW), yet CFE already had 54,000 MW of installed capacity to serve the public. In effect, CFE can not only meet peak electricity demand, but also has a surplus to meet the growth of the electricity sector consistent with the economic, social, and cultural development of our country.
The challenge facing the country is not related to the quantity of the electricity produced, but to the quality and the cost of the energy services received by Mexicans. The challenge is to improve service to generate more clean energy at competitive prices, and reduce losses in the transmission and distribution networks.
2.1 Generation Cost
Service rates
According to a comparative study conducted in 2012, the average electricity rate in Mexico was 25% higher than in the United States. However, if subsidies implemented by the Mexican government are excluded, the average rate was 73% higher than in the neighboring country.
Comparative percentages between Mexico and the USA
On a sector comparison basis, it can be seen that the greatest rate difference between Mexico and the United States was for residences with the highest levels of consumption, which on average were assessed at rates 149% higher than those offered in the United States. Meanwhile, electricity rates for commercial, industrial, and utility sectors in Mexico were 135%, 84% and 69% higher, respectively, than the rates for the same sectors on average in the United States. This was an obstacle to economic growth, since electricity is a basic economic input to the industrial, commercial, and service sectors.
Figure 1. Comparison of electricity rates between Mexico and the United States (2012)
Sources: Energy Information System, Energy Information Administration (United States). US rates converted into pesos at the exchange rate of 12.60 pesos / dollar.
High costs of electricity service
The question, then, is what were the reasons behind the higher electricity rates in Mexico? To a large extent, this corresponds to the type of fuels used in the process of power generation. In this regard, it is worthwhile to note that 80% of the cost of power generation depends on the price of the fuel used for generation. So, if expensive and pollution-causing fuels, such as fuel oil or diesel are used, electricity will be more expensive and the environmental impact will be greater. Conversely, if low-cost and environmentally-friendly fuels, such as natural gas and constant renewable sources, are used, the electrical energy will be competitively priced and its generation will have a lower environmental impact.
Use of expensive fuels
In 2012, about 46% of the electricity generated used natural gas. However, 21% of the installed capacity worked from fuel oil, which at that time was four times more expensive and 68% more polluting than natural gas (according to the International Energy Agency, āCO2 Emissions from Fuel Combustionā, 2012). Proof of this is that in the same year, the average cost of electricity generation in Mexico was 63% higher than in the state of Texas, USA, where most of the electricity is...