Mexico’s Energy Market Reform: What Your Business Needs to Know
Generally speaking, I’ve found that most US-based executives and corporate energy managers have felt the pain of wild swings in utility tariff rates in Mexico, but few have a strategy to take advantage of the country’s new competitive energy markets.
Given that many of Mexico’s utility (CFE) tariffs have surged over 50% since January 2016, I found this surprising.
Last year, the Mexican government instituted reform that established competitive energy markets. Prior to that, the country’s energy market was essentially an opaque government monopoly. As a result, many of the executives tasked with managing their organization’s global energy strategies are unfamiliar with the dynamics of the Mexican energy market. Even those with a firm understanding of Mexico's energy infrastructure may lack experience dealing in a competitive market.
To help bridge the information gap, we’ve broken down Mexico’s shift to a competitive landscape for buying energy and what it means for businesses with large-scale operations in the country.
We are also participating in a live webinar with Energy Manager Today on Wednesday, June 21, where the discussion will focus on how businesses can capitalize on this new opportunity to get strategic about their energy expenses in Mexico.
Why Mexico De-Regulated Its Energy Markets
Prior to January 2016, the Comisión Federal de Electricidad (CFE) held a monopoly on the generation, transmission, and distribution of electricity in Mexico. Under the CFE monopoly, manufacturers in Mexico had to deal with tariffs that changed monthly and which have climbed by more than 50% in the past 12 months. Monthly tariff changes and surging prices made it impossible to forecast energy costs effectively.
Similarly, industrial organizations that require large amounts of natural gas in Mexico were limited to a single supplier. Petróleos Mexicanos (Pemex), the state-sponsored oil and gas enterprise, held a monopoly on natural gas transportation in Mexico. Pemex sold natural gas to the LDCs, who in turn sold the gas to industrials. Pemex and the LDCs were thus able to exercise pricing power.
High energy costs made it difficult for Mexico’s industrial businesses to compete internationally. As it became clear that the traditional nature of the market and the roles of CFE and Pemex were causing these kinds of challenges, Mexico began exploring alternatives for their energy market.
Energy Reform in Mexico
Since 1938, Pemex held a monopoly on oil and gas production and transportation. Due to geological challenges and operational inefficiencies, Pemex oil and gas production has decreased every year since 2004 despite annual increases in exploration and production investments.
Recognizing that the increasingly negative correlation between expenditures and production was not sustainable, the Mexican government began an arduous energy reform process in 2013. Mexico’s energy reform culminated in several rounds of legislation with amendments to the Mexican Constitution.
In the process of creating competitive markets for electricity and natural gas, Mexico’s Energy Reform disaggregated portions of CFE and Pemex. The former monopolies are no longer vertically integrated entities. Instead, power generation became a competitive industry function and natural gas transportation opened to private bidders in open auctions.
It’s important to note that CFE is still responsible for power transmission and distribution. Industrial firms that choose to shop for power in Mexico stay connected to the same power grid and are ensured the same service reliability that they’ve experienced to date.
What This Means for Your Business
Organizations that use 1MW or more in aggregate demand are now able to access the wholesale power market. After applying to become a Qualified User, your organization can contract with an independent retail supplier for fixed rates, which are below the CFE tariff rates. Currently, 21 qualified suppliers in Mexico are competing with the CFE for industrial supply contracts, with ongoing increases in liquidity.
Many of us at EnerNOC who were involved with energy deregulation in the US recall the challenges of contracting in a brand new marketplace. Mexico has learned from that history and has implemented international best practices in the process of designing its electricity and natural gas markets. We are excited to help our customers find cost savings and budget certainty in the new Mexican energy markets.
If you’re looking to discuss your options in Mexico, talk to one of our experts, and to learn more about the opportunities for your business in this market, make sure to sign up for our upcoming webinar with Energy Manager Today.