The past and present

The core structure of the Mexican electric power industry was defined in 1960 and is embedded within two Constitutional articles. They defined power generation and supply as a “public service” and established the State’s exclusive right to its provision. The prevailing political and economic practices at the time sought to use this “public service” to build up a strong energy sector capable of detonating national development.

As a consequence, the electricity sector developed into two vertically integrated state monopolies: the Comisión Federal de Electricidad (CFE) and Luz y Fuerza del Centro (LFC). CFE is the country’s main generator, owner of the National Transmission Grid and distributor (to around 80 per cent of the population), while LFC, whose generation and transmission activities are much smaller is concentrated in distribution in the central area of the country, including the capital city.

For decades, it seemed convenient for the State to play an exclusive role in the electricity sector. It expanded and integrated the national electricity system and achieved complete coverage across the entire country. Currently 95 per cent of the population is connected to the grid. But by 1992, investment requirements to continue the expansion and modernisation of the Mexican electricity sector, made it necessary to amend the Ley del Servicio Público de Energía Eléctrica (Electricity Law) to allow private investment to complement public resources assigned to it.

The modified law, which is still valid, allows the private sector to participate in activities previously reserved to the state and no longer regarded as a “public service” including co-generation, self-supply, independent power production, exports, and imports for self-consumption. Since these modifications did not alter the industry structure, public utilities remained as vertically integrated monopolies. Private companies may use electricity from a co-generation or self-supply power plant but their capacity to sell surplus power to the national grid is limited.

Industry has since then developed self-consumption projects with different fuels, such as natural gas, diesel, fuel oil, wind, water or waste. The modality of Independent Power Production (IPP) consists of a long-term power purchase agreement (25 years) with CFE, which is assigned through a bidding process. Private companies may build power plants to sell electricity abroad, and imports are allowed for self-consumption. CFE and LFC offer the transmission service (open access) to all of private generators, when public service transmission has been covered. The Comisión Reguladora de Energía (CRE)[2], created in 1995, acts as regulator for the electricity and gas markets. 

The present and future expansion of the electricity sector is and will be supported by natural gas plants. Pemex –the state-owned oil company- or alternative private companies will supply the industry with either domestically produced or imported natural gas.

During the past 8 years, (from January 1994 to June 2002), 213 permits have been issued under the schemes provided by the 1992 amendments to the Electricity Law. Of these, 193 are operational and account for a total capacity of 19,043.5 MW. It is interesting to note that the majority of the projects have been awarded through the self-supply modality contracts. This type of contract allows generators to deliver electricity to their partners, consumers, and the stockholders of the power plant.

Despite the 1992 amendments, private participation is still limited. Today, co-generation and self-supply generation account for 6.4 per cent of total generation installed capacity[3]. This is largely because the current legal framework does not allow private generators with excess capacity to engage with CFE and LFC in long-term Power Purchase Agreements without a bidding process. A bidding process –versus a wholesale market- makes operations between players less dynamic and erodes the ability of prices to act as market signals.The nature of the bidding process is such, that even under the independent power production modality, the government ends up guaranteeing the financing of new infrastructure and paying for the capacity and energy provided by the private company through a long-term Power Purchase Agreement. Thus it assumes all of the risk.

Reforming the sector

Mexico experienced a period of economic expansion during the end of the 1980s and through the 1990s that translated into high rates of growth in electricity consumption, which reached almost 6 per cent per year between 1990 and 2000. This relatively high rates of growth were a reflection of the country's industrial activity; more than half of the electricity demand comes from industrial and commercial customers. The regions that have experienced significant growth in demand coincide with areas of sustained industrial growth, namely the northeastern state of Baja California and the peninsular area of Yucatán.

Despite these increases, per-capita consumption of electricity in Mexico today remains low at around 1,300 kWh per year. This figure is much smaller than that of other countries with a similar degree of economic development such as Argentina, Brazil and Venezuela, which have per-capita consumption of 2,045, 1,945 and 2,605 kWh per year respectively, not to mention relative to more advanced countries[4].

These figures highlight the sector’s development potential in the near future. As the population engaged in - and the benefits form - energy intensive industries keeps growing, per-capita consumption is expected to increase. In order to respond to these challenges, the current generation capacity will need to be increased by more than 26,000 MW in the next ten years. It will also be necessary to expand and modernise the transmission and distribution systems. To achieve this, significant investments are required; official estimates suggest a figure of around US$55 billion within the next ten years. The Federal Government will not be able provide the resources needed, hence, attention has turned towards the private sector.

The new policy

The electricity reform that the executive has submitted to Congress, amends the existing legal framework in order to allow increased private participation while preserving a leading role for the State –mainly as a regulator and supplier to residential customers – within the electricity industry. The main characteristics of the proposed market structure are described below.

The CRE will establish the regulatory frameworks for third party access that should guarantee a competitive market. These rules, taken under economical criteria, will promote the development of new generation capacity in particular in the areas where it is most needed. In addition, a new independent entity named CENACE[5] will be created. It will administrate the grid and effectively manage a wholesale market. Today the CENACE is already in operation as a CFE’s internal division; therefore the reform includes the administrative and legal changes to transform it into an independent body.

Generation

While the sate retains the monopoly over the generation of nuclear energy, private participation is envisaged for any other fuel and technology. The current generation modalities (independent power production, small, generation, co-generation, self-supply, exports and imports for self-use) that are already in place will be preserved.  Public and private generators will be allowed to either sell their electricity to CENACE for resale or to establish bilateral supply contracts with qualified users. In the latter case, since no public entity is participating the transaction will remain unregulated.

Transmission

Transmission would be carried out under economical criteria and regulated by CRE. All public and private generators may offer their electricity to CENACE and receive the correspond payment within a clear and transparent regulatory framework.  The National Transmission Grid will offer an open access and non-discriminatory transmission service to generators, where service tariffs will be regulated by the CRE. In addition, CFE and LFC will remain responsible of the expansion and maintenance of the National Transmission Grid.

Distribution

Distribution is divided between “qualified” and “non-qualified users”. The CRE will grant the “qualified user” status to customers whose consumption exceeds 2,500MWh per year. These “qualified users” will have the right to choose from all available suppliers. Distribution to non-qualified users is still considered to be a “public service” and the state keeps the monopoly of their distribution, mainly to residential customers. The public service tariffs will be established by CRE also under economical criteria. Currently, industrial tariffs have a subsidy of around 6 per cent, while domestic tariffs are subsidised in at least 45 per cent. Subsidies granted to isolated zones, rural electrification and low-income communities would be managed and addressed by the Federal Government.

The role of the government

To guarantee the efficient and transparent operation of the new market structure, the responsibilities of the CRE will be broaden, along with its autonomy. Among the activities undertaken by the CRE are:

• Regulation of electricity generation, transmission and distribution
• Operational control of the national transmission grid and dispatch operation;
• Purchase of capacity and energy carried out by state-owned entities
• Approval of the tender conditions to add new capacity by state-owned enterprises (mainly, the IPPs bid documents)
• Maintenance of the record of “Qualified Users”

The Federal Government, through the Ministry of Energy will be responsible for approval of the institutional programs of the public utilities (CFE & LFC) and CENACE. Based on the recommendations of CENACE, the Ministry of Energy will manage the expansion and substitution of generation capacity. To match the new arrangements, the main public generator will also suffer a transformation. It will preserve all its assets and continue to offer electricity along with the private generators, except in the case of nuclear power where it will keep the monopoly. CFE will be allowed to participate with private partners in new business (optic fiber, natural gas supply, water supply, and others), joint ventures, strategic alliances and to offer advisory and engineering services.

Final Remarks

The Mexican Government is trying to establish the necessary conditions to improve the efficiency of the electricity market. By setting clear and transparent rules it seeks to enhance competition and promote public and private investment. The combination of resources and activities between the private sector and the public utilities would allow a better service for customers and ultimately reduce tariffs. Finally, and perhaps most importantly, the Mexican Government will be able to redirect investment that would otherwise take place in electricity to social programs in health, education and poverty allevation. These programs are essential in a country with a high incidence of poverty.IJ

[1] The views presented in this article are those of the author only, and do not represent those of the Mexican Ministry of Energy. The author gratefully aknowledges Jimena Marvan and Alejandro Cuevas for their assistance.

[2] Energy Regulatory Commission

[3] Mexico’s total installed capacity amounts to 44,165 MW: CFE (82.0 per cent), LFC (1.9 per cent), PEMEX (4.1 per cent), independent power producers (5.5 per cent) and co-generators and self-suppliers (6.4 per cent). Generation from co-generators and self-supply contracts is 2,826 MW, 75 per cent of which corresponds to contracts signed after 1992.

[4] The per-capita consumption of electricity in the US is around 12,211 kWh per year, and in Spain it is 5,390 kWh per year.

[5] National Energy Control Center