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Mexico’s Power Sector Update: MXN2 trillion investment for 2017-31 [free access]

September 10, 2017

Mexico’s energy sector is undergoing profound changes, catalysed by the comprehensive Reforma Energética (Energy Reform) initiated by the government in 2013. The key objectives of the reforms are to recast the over eight decade-old energy structure by ending the monopolies of various state-affiliated enterprises, and open up the sector to private and international investments. The reform measures were mainly driven by the country’s high dependence on expensive oil for power generation, high transmission and distribution (T&D) losses, rising power demand, low per capita power consumption, rising power tariff and the need to meetenvironmental commitments on the global front.

 

Under the reforms, the government has restructured state-owned energy firm Comision Federal de Electricidad (CFE), which holds the monopoly in the Mexican power sector, to allow direct private investment in the generation and trade of electricity under the purview of a new wholesale market; and to establish partnerships and sign contracts with private players to finance, manage, operate, maintain and expand the T&D network. Recently, Mexico’s Secretaría de Energía (SENER) or Ministry of Energy published the guidelines for the Financial Transmission Rights (FTR) Auctions to separate scheduling of the transmission system from its ownership. This will offeropen access to large consumers and boost competition in the market.

 

To attract the needed investment, SENER, along with Centro Nacional de Control de Energía (CENACE) or the National Center for Energy Control, has also released the Programa de Desarrollo del Sistema Eléctrico Nacional (PRODESEN) 2017-31, a 15-year infrastructure development programme for the country’s national electric system. Under PRODESEN 2017-31, the country has planned to invest about MXN2 trillion over the next 15 years in power-related infrastructure projects. Of the total proposed investments, 81 per cent is earmarked for generation projects, 11 per cent for transmission projects, and 8 per cent for distribution projects. In addition, the Mexican government has presented the Programa de Redes Eléctricas Inteligentes (REI) or Programme of Intelligent Electrical Networks, which aims to create a smart energy T&D grid in the country. The implementation of the new smart system will require investments of about MXN11.64 billion during an eight-year period.

 

Existing power market

Mexico’s power sector is among the fastest growing sectors in the country, with the power demand maintaining a growth rate of 2.5 per cent to 4.5 per cent. To meet this demand, the power generation capacity during 2011-16 increased at a compound annual growth rate (CAGR) of 4 per cent from 61.6 GW in 2011.

 

As of December 2016, Mexico’s power generation sector had 73,510 MW of capacity, of which 38 per cent was combine cycle-based, 17 per cent was conventional thermoelectric-based, 17 per cent was hydropower-based, 7 per cent was coal-based, 7 per cent was turbo gas-based, and the remaining 14 per cent was renewable energy-based.

 

The T&D network, known as Sistema Eléctrico Nacional (SEN), comprises the Sistema Interconectado Nacional (SIN)—the national interconnected system—and the isolated network of Baja California. The Red Nacional Transmisión (RNT) or national transmission network spans 53 regions, of which 45 are interconnected via 63 individual connections within the SIN. The remaining eight regions are located in the Baja California Peninsula, of which seven are interconnected, leaving the Mulege region in the central part of Baja California as the sole region without any interconnections.

 

As of December 2016, the SEN comprised 104,133 km of line length and 197,435 MVA of transformer capacity at the 69 kV to 400 kV voltage levels.

 

New power market structure

In December 2013, the Mexican government adopted legislative amendments to open up the electricity sector to further private investment and make it more competitive. This was followed by the passage of the secondary energy reform law [Ley de la IndustriaEléctrica (LIE) or Electricity Industry Law], which resulted inthe creation of a wholesale power market, the unbundling of CFE, the hosting or planning power auctions,the release of FTR auction guidelines and many other regulatory developments.

 

Post energy reforms, the market has been liberalised for the generation and supply of electricity. CFE now faces competition from private players in generation and market operations. The new market structure has provided large energy consumers access to the wholesale power market, limiting CFE’s monopoly in the consumer sector. Qualified users and market participants can now participate in a competitive environment, which in turn will help in reducing power costs and improving service.

 

New generation projects governed by the LIE are being offered by the government during long- and mid-term auctions, as well as in short-term markets. Projects that are in the pre-construction and construction stages are allowed to participate in long-term auctions, enabling them to secure a stable income before starting operation. Under the law, new mechanisms have been introduced, such as clean energy certificates, financial transfer rights and ancillary services.

 

The power T&D sectors have remained reserved for the federal government. However, the LIE stipulates that CFE can enter into contracts or partnerships with private players for the operation and maintenance of T&D networks. Electricity market restructuring also resulted in separating the scheduling of the transmission system from its ownership.

 

SENER has published guidelines for FTR auctions under the Manual de Subastas de Derechos Financieros de Transmisión document or the manual of financial transmission rights auctions. These guidelines govern the auction process for the newly created FTR market. As per the guidelines, FTR auctions will be conducted in two phases. Phase one will include auctions for FTRs with a one-year term under a simplified auction process. These auctions will occur annually, between October and November of each year, and the FTRs auctioned will be effective from January to December every year. Phase two will include auctions for FTRs with advanced specifications with terms of three years, one year, seasonal (quarterly) and monthly. While the document does not include official dates and timelines for auctions, CENACE is required to publish the FTR auction schedule at least six months prior to the offer period for annual auctions and at least two months prior to the offer period for monthly auctions. As part of the first FTR auction, CENACE may auction FTRs with limited one-month terms in order to encourage participation. One year after the first annual FTR auction, private entities will be permitted to engage in the sale and trade of FTRs as bilateral transactions. For these, CENACE’s role will be limited to operating the trading platform and it will not participate in negotiations. However, parties must report bilateral transactions to CENACE to enable tracking and registration of such trades.

 

Future investments in the power sector

Based on CENACE’s planning scenarios mentioned in PRODESEN 2017-31, power consumption in the country is projected to grow by an annual average rate of 2.9 per cent during the 2017-31 period. SIN’s maximum demand is expected to increase on average by 3 per cent annually while demand in the Baja California systems is expected to range from 3.7 per cent to 4 per cent on an annual basis during this period.

 

Figure 1: Planned investment under PRODSEN 2017-31 (MXN billion)

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 Source: SENER

 

To cater to this demand, the government plans to invest about MXN2,040 billion over the next 15 years to expand the power network. Of the total planned investment, MXN1,655 billion will be spent on generation projects, MXN219 billion on transmission projects, and MXN165 billion on distribution projects. Majority of the investments across the value chain are aimed at developing, extending and modernising the entire electricity network.

 

With these investments, the total installed capacity is likely to reach 113,269 GW by 2031. For the next 15 years, 16 GW of capacity are expected to be retired (mainly conventional thermal units), while 56 GW of capacity will be added. Of the total capacity addition, 37 per cent will be based on conventional technologies while 63 per cent will be based on renewable energy. The planned capacity additions reflect Mexico’s strong commitment to harnessing clean energy sources. The country has set a goal to achieve 35 per cent of total power generation capacity from clean energy sources by 2024. By 2050, 50 per cent of Mexico’s electricity is expected to come from clean energy resources. The goal will be reached through the clean power auctions and the obligation to purchase clean energy certificates.

 

About 97 per cent of the estimated MXN219 billion to be invested in the transmission network is aimed at grid expansion and to increase voltage and compensation support while the remaining investment will be for modernising the RNT. About 47 per cent of RNT investment will be spent ontransmission lines projects, 48 per cent on transformer projects and 6 per cent on compensationprojects. During 2017-31, 23,772.5 circuit-km of line length capacity will be added to Mexico’s transmission network through 410 projects, 58,099 MVA of transformer capacity through 256 projects and 11,930 MVAr compensation capacity through 259 projects. The country is working towards expanding its power network, interconnecting Baja California with the grid and setting up interconnections with other countries.

 

CFE is also working to prepare the bid documents for the country’s first ever transmission project to be offered to private players. Reportedly, CFE is likely to publish tender details for the ±500 kV Yautepec Potencia–Ixtepec Potencia project in December 2017 and award the project by March 2018. The project is part of the Istmo De Tehuantepec–Valle De México (Oaxaca) project and will have a capacity of 3 GW. The bid specifications for the 610-km, ±500 kV high voltage direct current (HVDC) transmission line were to be announced in November 2016 after receiving comments from various stakeholders. However, the government is taking time to finalise the bid specifications, as these will also work as the basis for issuing other high voltage tenders in the country. The project will be carried out as a public-private partnership (PPP) and will transmit electricity generated at Tehuantepec's wind farms to the centre of the country. The transmission line project requires investments of about USD1.2 billion and the contract is expected to be awarded by the end of 2017 for 25 years.

 

In addition, CFE is likely to issue a tender for two submarine transmission projects soon. One is the 27.5-circuit km, 115 kV, Playa del Carmen–Playacar–Chankanaab II line to be constructed in Quintana Roo state of the Peninsular region. The other is the 210-circuit km, ±400 kV HVDC Bahía de Kino–El Infiernito line, which is part of the Baja California Sur–SIN interconnection project.

 

With regard to the distribution network, 83 per cent of the estimated MXN165 billion will be spent on expansion and modernisation projects, and 13 per cent on smart grid projects. Creation of a smart T&D grid in the country has been proposed under the REI programme. Under the programme, 10 candidate projects have been identified to be taken up by CENACE. Key projects include dispatch of optimum reactive power, investigation on the use of new technologies to assist the black start process, demonstration of energy storage projects and their integration into grid operation, creation of next generation phasor measurement network, research on the use of dynamic limits in transmission lines, etc. In addition, six projects have been identified to be taken up at the transmission level, including study and implementation of intelligent tools that guide the physical operation process of the RNT; automatic fault location; development of a diagnostic system for circuit breakers and gas-insulated switchgear (GIS) substations; study, demonstration and implementation of protocols, hardware and applications for the integration of control centres; research on the use of asset condition information to improve operational reliability of the system; and creation of a geographic information system of the RNT. Projects to be taken up at the distribution level include energy balance management of the Redes Generales de Distribución (RGD) or the General Distribution Networks for the Mercado Eléctrico Mayorista (MEM) or the Wholesale Energy Market. To continue expanding and modernising the transmission and distribution networks, SENER will allocate more than MXN14.6 billion this year.

 

Conclusion

The Mexican government is taking several steps to boost investment in the electricity sector. The recent energy reforms represent a major breakthrough not only for domestic players but also for foreign investors. Given its geographical location, Mexico holds an important commercial and economic position in terms of foreign trade, especially with the US.

 

As per industry experts, opening the power sector to private participation will help Mexico mobilise about USD10 billion in investments annually, which is much needed to help meet the forecasted 85 per cent increase in electricity demand and bring about a 14 per cent reduction in industrial electricity prices by 2040. The unbundling of the CFE and long-term auctions for energy, capacity and clean energy certificates provide new players access to Mexico’s power market on a competitive basis. The new policy and market design also provides a cost-effective solution to introduce low-carbon generation into the energy mix, thus helping the country achieve its clean energy targets.

 

Table 1: Key planned transmission projects in Mexico

 

Name of project

Developer (s)

Voltage (kV)

Length (km)

Scheduled completion

Baja California–SIN Interconnection

CFE

±500 kV HVDC, 400 kV AC and 230 kVAC

978.0

2022

Istmo de Tehuantepec–Valle de México transmission project

CFE

±500 kV HVDC and 400 kV AC

885.5

2020

Transmission network for the use of wind resources of Tamaulipas

CFE

400 AC

137.5

2021

Huasteca–Monterrey transmission project

CFE

400 AC

220.9

2018

Transmission line associated with ciclocombinado Empalme I project

CFE

230 kV AC and 400 kV AC

220.4

2018

Sureste–Peninsular Phase II transmission project

CFE

230 AC

183.5

2017

Transmission system for connecting the Lerdo (Norte IV) combined cycle power plant

CFE

400 AC

270.0

2018

Torreón Sur–1° de Mayo transmission project

CFE

400 AC

125.0

2018

Choacahui–Bácum transmission project

CFE

400 AC

124.5

2017

Transmission line system of the northwestern areas, Phase 1

CFE

400 kV AC and 115 kV AC

104.0

NA

Transmission line associated with ciclocombinado Empalme III project

CFE

400 AC

140.0

NA

Angostura–Tapachula Potencia transmission project

CFE

400 AC

96.7

NA

Baja California Sur–SIN interconnection

CFE

±400 kV HVDC, 400 kV AC and 230 kV AC

906.0

2021

Lerdo–Camargo II transmission project

CFE

400 AC

165.0

2024

Las Mesas–Atlacomulco Potencia transmission project (C1 and C2)

CFE

400 AC

240.0

2020;2024

Valladolid–Tulum line

CFE

400 AC

105.0

2023

Escárcega Potencia–Ticul II transmission project

CFE

400 AC

134.0

2024

La Ciénega–Xipe transmission project

CFE

400 AC

95.0

2023

Tabasco Potencia–Escárcega Potencia transmission project

CFE

400 AC

149.0

2024

Poza Rica II–Tamos transmission project

CFE

400 AC

99.0

2025

Note: AC–alternating current; DC ­– direct current; HVDC–high voltage direct current

Source: Global Transmission Research