For Prospective Contractors in the Electricity and Energy Marketplace
For energy market watchers and those involved in contracting for electricity and energy production, the recent historic reforms to Mexico’s energy sector have been welcome news. While far from denationalizing these major Mexican assets, great parts of Mexico’s significant oil reserves will be open to development by private and international companies. This will mean a significant opportunity for some energy firms and those servicing the same sector.
Petroleos Mexicanos (Pemex) is the traditional state monopoly on oil. The present reforms will end the monopoly though Pemex will remain the dominant oil producer. Most of the excitement for oil’s future in Mexico stems from interest in deep water offshore sites within Mexican territory where significant investments are necessary. For most of these areas, private international firms are considered the best way to effectively tap potential.
While all of the changes are complex and require equally complex supporting laws and changes to regulations, the opening of bidding to private and international companies remains the most important change to Mexican energy in more than a half century. These reforms and those described below are perceived as having been necessary for the continued growth of Mexico’s overall economy.
Mexico’s Comisión Federal de Electricidad (CFE) is the longstanding state monopoly of electricity generation. While reforms in the electricity market attract a great less attention from international observers, electricity has been especially important for Mexico’s manufacturing sector. Mexico exports plastics, steel and iron, machinery and appliances as well as increasing numbers of aircraft and parts.
Relative to other markets, electricity costs have remained exceptionally high. Even despite Mexico’s other strong advantages in manufacturing, electricity costs have started to hold a damper over the country’s otherwise strongly growing economy. There’s still no end in sight.
The CFE is working closely with the federal government to control costs and addressing issues across the market have come strongly to the foreground for those watching Mexican economic performance. Years of underinvestment in midstream energy infrastructure have led to failing and badly antiquated pipelines, generators and basic electric grid components. Natural gas, though at dream prices, can not be moved and even storage tanks are inadequate.
Projects aimed at lowering rates for consumers and industry are abundant.
Five pipelines are planned to increase natural gas to electricity generation plants. Branch pipelines are intended to increase efficiency and all of these will support four new, natural gas electricity plants. On and offshore pipelines will also support the import of affordable natural gas from several suppliers in the United States. One of the biggest is being built to supply Gulf Coast generating plants and is expected to come online by summer of 2016. Together, the CFE expects to increase pipeline capacity for natural gas by 75%.
Plans also call for a series of electricity transmission and distribution projects, including 3,000 kilometers of distribution lines, substations and upgrades and retrofittings to existing facilities. While most of these projects are slated for completion by 2017 and 2018, adding 2,300 kilometers of pipelines and 1,442 megawatts of generating capacity to any network takes some serious planning.
Transmission and Distribution activities still face strong restrictions, but the Mexican government may enter into agreements or partnerships for any infrastructure needs required by the broader grid. That’s good news for lots of suppliers and increases of 3.5% in awarded contracts are expected over the medium and long-term projections.
All of the reforms are intended to transform the CFE in a Productive State Owned Enterprise. The CFE will retain corporate governance control to select the business model to follow. The CFE needs to support the contracting and purchases, leasing and administer public debt, while promoting the competitive marketplace.
The Regulatory Framework
Three agencies oversee the newly emerging electricity sector. The Secretaría de Energía (SENER) is federal department with a policy function. The Comisión Reguladora de Energía (CRE) performs a regulatory role. The Centro Nacional de Control de Energía (CENACE), is a new federal agency, which oversees power distribution and the wholesale electricity market. It’s essentially the grid manager for the entire country.
That’s where things get exciting. Participants in this new wholesale electric market may be electricity generators, or qualified customers who are purchasing high minimum quantities, especially manufacturers. Marketing companies also participate by selling electricity to end users or qualified customers.
The newly de-monopolized CFE will still be big concern with control over transmission and distribution, but private actors are now free to bid on operational, construction, and maintenance jobs related to all of these facilities and infrastructure components.
Of course, not every player can leap into the international marketplace. Significant technical and documentary obstacles will prevent all but the best from making the leap. But this historic opportunity doesn’t appear to be but a flash in the pan.