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Electricity Sector Outlook

2017-2031

Mexico, 2017

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Secretariat of Energy Pedro Joaquín Coldwell Secretary of Energy Leonardo Beltrán Rodríguez Deputy Secretary of Energy Planning and Transition Fernando Zendejas Reyes Deputy Secretary of Electricity Aldo Flores Quiroga Deputy Secretary of Hydrocarbons Gloria Brasdefer Hernández Senior Officer Rafael Alexandri Rionda Director General of Energy Planning and Information Víctor Manuel Avilés Castro Director General of Social Communication

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Elaboration and Review: Rafael Alexandri Rionda Director General of Energy Planning and Information ([email protected]) Fabiola Rodríguez Bolaños Director for the Integration of the Sector’s Outlooks ([email protected]) Alain de los Ángeles Ubaldo Higuera Deputy Director of Energy Consumption ([email protected]) Eder García Jimenez Deputy Director of the Energy Sector Planning ([email protected]) Thalia Ramírez Flores Head of Department of Energy Markets Planning (tramí[email protected]) Diana López Becerril Internship Administrative support: María de la Paz León Femat, Maricela de Guadalupe Novelo Manrique. 2017. Secretariat of Energy

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Acknowledgements

National Energy Control Center

Federal Electricity Commission

National Commission for the Efficient Use of Energy

Energy Regulatory Commission

Corporate Operations Directorate of PEMEX

Ea Energy Analyses

PEMEX Corporate

Secretariat of Finance and Public Credit

Undersecretariat of Hydrocarbons, SENER

Undersecretariat of Electricity, SENER

Directorate General of Clean Energies, SENER

Mexican Petroleum Institute

National Institute for Electrical Research and Clean Energies

National Institute for Nuclear Research

Mexico-Denmark Cooperation Program in Matter of Energy and Climate Change

Technical University of Denmark, Department of Energy Systems Analysis

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1. Index

Index .....................................................................................................................................................................................5

Index of Charts ...................................................................................................................................................................9

Index of Tables ................................................................................................................................................................ 10

Index of Figures ............................................................................................................................................................... 11

Index of Maps ................................................................................................................................................................... 14

Presentation ..................................................................................................................................................................... 15

Introduction ...................................................................................................................................................................... 16

Executive Summary ........................................................................................................................................................ 17

1. Legal and Regulatory Framework of the Mexican Electricity Sector ................................................. 19

1.1. Regulatory Framework ...................................................................................................................................... 19

1.1.1. Political Constitution of the United Mexican States .......................................................................... 20

1.1.2. Electric Industry Law ..................................................................................................................................... 20

1.1.3. Energy Transition Law.................................................................................................................................. 24

1.1.4. Planning Law ................................................................................................................................................... 25

1.1.5. Law of the Coordinated Regulatory Organs for the Energy Matters............................................ 25

1.1.6. Law of the Federal Public Administration (LOAPF) ............................................................................. 25

1.1.7. Law of the Federal Electricity Commission ............................................................................................ 25

1.2. Electricity Sector Planning Instruments and Policies ................................................................................ 26

1.2.1. Transition Strategy to Promote the Use of Cleaner Technologies and Fuels ............................ 26

1.2.2. Auctions of the Electricity Market ........................................................................................................... 27

1.2.3. Issuing of Clean Energy Certificates ........................................................................................................ 29

1.3. Of the Devise of the Electricity Sector Outlook ........................................................................................ 30

2. Historical Diagnosis of the Electricity Sector ............................................................................................ 31

2.1. Mexican Economy Analysis .............................................................................................................................. 31

2.2. Electric Power Users and Tariffs ..................................................................................................................... 32

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2.2.1. Electric-Power Users ..................................................................................................................................... 33

2.2.2. Average Prices of Electricity ...................................................................................................................... 36

2.3. Electricity Sales, Consumption, and Demand ............................................................................................. 37

2.3.1. Electricity Sales .............................................................................................................................................. 38

Remote Self-Supply ........................................................................................................................................................ 40

Electricity Losses ............................................................................................................................................................. 41

2.3.2. Electric Power Consumption ...................................................................................................................... 42

2.3.3. Electricity Demand ........................................................................................................................................ 44

Maximum Coincident Demand ................................................................................................................................... 44

Maximum Gross Demand ............................................................................................................................................. 45

2.4. Infrastructure of the Electric National System .......................................................................................... 46

2.4.1. Electricity Generation Installed Capacity ............................................................................................... 46

2.4.2. Electric Power Gross Generation .............................................................................................................. 51

Changes in the Infrastructure of the SEN’s Electricity Generation Plants .................................................... 54

2.4.3. Electricity Transmission and Distribution Grid ..................................................................................... 55

Transmission .................................................................................................................................................................... 55

Distribution ....................................................................................................................................................................... 58

Cross-Border Interconnections ................................................................................................................................... 58

2.5. Electric Power Trade .......................................................................................................................................... 60

3. Electricity Sector Outlook ................................................................................................................................ 61

3.1. Assumptions of the Planning Scenario ......................................................................................................... 61

3.1.1. International Environment .......................................................................................................................... 61

3.1.2. Development Program for the National Electricity System............................................................. 62

3.1.3. Macroeconomic Forecasts .......................................................................................................................... 63

Gross Domestic Product ............................................................................................................................................... 63

Population.......................................................................................................................................................................... 64

Exchange rate .................................................................................................................................................................. 64

3.1.4. Fuels Prices Forecasts .................................................................................................................................. 64

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3.1.5. Clean Energy Targets and Potentials of Renewable Energies ......................................................... 65

3.2. Expected Behavior of Electricity Demand and Consumption ................................................................ 67

3.2.1. Maximum Demand........................................................................................................................................ 67

3.2.2. Gross Consumption ...................................................................................................................................... 69

3.3. Expansion of the National Electric System ................................................................................................. 73

3.3.1. Electricity Generation Capacity ................................................................................................................ 73

Additions of Electricity Generation Capacity ......................................................................................................... 73

Electricity Generation Capacity Withdrawal .......................................................................................................... 79

Expected behavior of the electricity generation capacity ................................................................................. 79

3.3.2. Electric-Power Generation .......................................................................................................................... 81

Electricity Generation by Technology ...................................................................................................................... 81

Electricity Generation by Control Region ................................................................................................................ 83

Fuels Consumption ......................................................................................................................................................... 84

3.3.3. Reserve Margin............................................................................................................................................... 85

3.3.4. Expansion of the Transmission and Distribution Grid........................................................................ 86

Transmission .................................................................................................................................................................... 86

Distribution ....................................................................................................................................................................... 89

4. Sensitivity Exercise ............................................................................................................................................ 90

4.1. Study of the Long-Term Impact of the Natural-Gas Prices in the Electricity Sector .................... 90

4.1.1. Background ...................................................................................................................................................... 90

Importance of the utilization of NG in the Electricity Sector ............................................................................ 91

4.1.2. Methodology, Inputs, and Description of the Scenarios ................................................................... 93

Inputs for the planning and description of the scenarios ................................................................................... 94

Scenarios Description .................................................................................................................................................... 96

4.1.3. Analysis of the Results................................................................................................................................. 97

Investments and capacity expansion ....................................................................................................................... 97

Electric Power Generation and Fuel Consumption ................................................................................................ 99

Expansion of the Transmission Grid ...................................................................................................................... 102

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Greenhouse Gases Emissions ................................................................................................................................... 102

Electricity Prices............................................................................................................................................................ 104

4.1.4. Conclusions .................................................................................................................................................. 108

A. Statistical Annex .............................................................................................................................................. 109

B. Methodological Annex ................................................................................................................................... 128

Glossary .......................................................................................................................................................................... 133

Abbreviations and Acronyms ................................................................................................................................... 151

References...................................................................................................................................................................... 154

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Index of Charts

Chart 2. 1. Interconnection with North America .................................................................................................... 58

Chart 3. 1. Clean-Energies Potential .......................................................................................................................... 66

Chart 3. 2. Additional Capacity by Modality and Technology, 2017-2031 .................................................. 75

Chart 3. 3. Additional Capacity by Status of the Project and Technology,2017-2031 ............................ 76

Chart 3. 4. Transmission Regions................................................................................................................................ 86

Chart 3. 5. New Projects for Expanding the RNT and the RGD ......................................................................... 87

Chart 3. 6. Other Projects ............................................................................................................................................. 88

Chart 3. 7. Distribution Projects .................................................................................................................................. 89

Chart 4. 1. Pollutant Emissions by Fuel...................................................................................................................... 93

Chart A. 1. Projects under Study and in Prospective Analysis in 2015 which are part of the PRODESEN 2017-2031 ..................................................................................................................................................................... 109

Chart A. 2. Projects under Study and in Prospective Analysis in 2016 Which Are Part of the PRODESEN 2017-2031 ..................................................................................................................................................................... 110

Chart A. 3. Projects Programmed and Instructed by the SENER in 2015 Which Are Part of the PRODESEN 2017-2031 ............................................................................................................................................... 111

Chart A. 4. Projects Programmed and Instructed by the SENER in 2016 Which Are Part of the PRODESEN 2017-2031 ............................................................................................................................................... 112

Chart A. 5. Transmission Projects Which Are Part of the PRODESEN 2017-2031 ................................ 113

Chart A. 6. Projects of Transformation Which Are Part of the PRODESEN 2017-2031 ...................... 117

Chart A. 7. Compensation Projects Which Are Part of the PRODESEN 2017-2031 ............................. 120

Chart A. 8. Power-Plants Investmen Catalog in Balmorel ............................................................................... 126

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Index of Tables

Table 2. 1. Main Macroeconomic Variables of Mexico, 2006-2016 ............................................................... 32

Table 2. 2. Electricity Users by Operational Area .................................................................................................. 34

Table 2. 3. Users’ Share by Electricity Operational Area ..................................................................................... 35

Table 2. 4. Average Price of Electricity by Operational Area ............................................................................. 37

Table 2. 5. Electricity Remote Self-Supply ............................................................................................................... 41

Table 2. 6. Electricity Losses 2006-2016 ................................................................................................................ 42

Table 2. 7. Maximum Gross Demand ........................................................................................................................ 45

Table 2. 8. Behavior of the SEN’s Electricity Generation Capacity by Modality, 2016 .............................. 47

Table 2. 9. Changes in the Infrastructure of the SEN’s Electricity Generation Plants, 2016 ................... 54

Table 2. 10. Transmission Capacity by Control Region ....................................................................................... 56

Table 2. 11. Summary of the Transmission Lines’ Kilometers by Federal Entity 2016 ............................. 57

Table 2. 12. Distribution Lines ..................................................................................................................................... 58

Table 2. 13. Electric Power Foreign Trade ................................................................................................................ 60

Table 3. 1. Forecasts of the Integrated Maximum Demand by Control Region, Planning Scenario 2017-2031 ..................................................................................................................................................................................... 69

Table 3. 2. SIN’s Integrated and Peak Demands by Studied Scenario, 2017-2031 ................................... 69

Table 3. 3. Forecasts of the Gross Consumption by Control Region, 2017-2031 ..................................... 71

Table 3. 4. Behavior of the Capacity Additions by Federal Entity, 2017-2031 ........................................... 78

Table 3. 5. Behavior of the Installed Capacity by Type of Technology, 2017-2031 ................................. 81

Table 3. 6. Behavior of the Electric Power Total Generation by Technology, 2017-2031 ...................... 83

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Index of Figures

Figure 1. 1. SEN’s Regulatory Framework ................................................................................................................. 19

Figure 1. 2. Amendments to the Political Constitution of the United Mexican States in Electricity matter ................................................................................................................................................................................................ 20

Figure 1. 3. LIE Main Provisions .................................................................................................................................... 21

Figure 1. 4. Wholesale Electricity Market ................................................................................................................. 22

Figure 1. 5. Planning Elements and Control of the SEN ........................................................................................ 23

Figure 1. 6. Considerations for Elaborating the Programs of Expansion and Modernization of the National Transmission Network and the General Distribution Grids .............................................................. 23

Figure 1. 7. Main Objectives of the Energy Transition Law ................................................................................. 24

Figure 1. 8. Activities of CFE ......................................................................................................................................... 26

Figure 1. 9. Percentage of Clean Generation in the Total Electricity Generation ........................................ 27

Figure 1. 10. Process of Electricity Auctions............................................................................................................ 28

Figure 1. 11. Characteristics of the Clean Energy Certificates .......................................................................... 29

Figure 1. 12. Requirements of Clean Energy Certificates Related to the Corresponding Obligation Periods ................................................................................................................................................................................. 30

Figure 2. 1. Macroeconomic Variables of Mexico, 2006-2016 ........................................................................ 32

Figure 2. 2. Users’ Share by Sector, 2016 ............................................................................................................... 33

Figure 2. 3. Users’ Share by Electricity-Operational Area, 2016 ..................................................................... 34

Figure 2. 4. Average Prices of Electricity by Tariff Sector .................................................................................. 36

Figure 2. 5. Average Prices of Electricity by Tariff Sector, January-December 2016 ............................... 37

Figure 2. 6. Electricity Sales and Consumption ...................................................................................................... 38

Figure 2. 7. Sectoral Behavior of Electricity Domestic Sales, 2006-2016 .................................................... 39

Figure 2. 8. Sales Composition by Sector ................................................................................................................ 39

Figure 2. 9. Domestic Sales Structure by Federal Entity and Statistical Region, 2016 ............................. 40

Figure 2. 10. Electricity Losses 2006-2016 ........................................................................................................... 42

Figure 2. 11. Behavior of Electricity Consumption by Control Region ........................................................... 43

Figure 2. 12. Electricity Consumption by Operational Area, 2016 ................................................................. 43

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Figure 2. 13. Maximum Integrated Demand by Control Region ...................................................................... 44

Figure 2. 14. Maximum Coincident Demand 2016 .............................................................................................. 45

Figure 2. 15. Behavior of the SEN’s Installed Capacity by Type of Technology .......................................... 46

Figure 2. 16. Installed Capacity by Type of Technology, 2016 ....................................................................... 47

Figure 2. 17. Behavior of the SEN’s Installed Capacity by Modality, 2006-2016 ...................................... 48

Figure 2. 18. SEN’s Installed Capacity by Modality, 2016 ................................................................................. 48

Figure 2. 19. Installed Capacity by Federal Entity ................................................................................................. 50

Figure 2. 20. Behavior of the Gross Generation by Type of Technology, 2006-2016 ............................ 51

Figure 2. 21. Gross Generation by Type of Technology 2016 ......................................................................... 52

Figure 2. 22. Gross Generation by Modality 2016 ............................................................................................... 52

Figure 2. 23. Gross Generation by Federal Entity ................................................................................................. 53

Figure 2. 24. Transmission Lines 2016 .................................................................................................................... 56

Figure 3. 1. Worldwide Electricity Generation and by Regions ......................................................................... 62

Figure 3. 2. Worldwide Capacity of Solar and Wind Power ............................................................................... 62

Figure 3. 3. GDP’s Forecasts, 2016-2031 ............................................................................................................... 63

Figure 3. 4. Population Growth Forecast in Mexico, 2017-2031 .................................................................... 64

Figure 3. 5. Currency Exchange Forecast, 2017-2031 ....................................................................................... 64

Figure 3. 6. Scenarios of Fuels Prices Forecasts, 2017-2031 ........................................................................... 65

Figure 3. 7. Trajectory of the Clean Energies Target, 2017-2031 ................................................................. 65

Figure 3. 8. Annual Growth Expected of the SIN’s Maximum Demand, 2017-2031 ................................ 67

Figure 3. 9. Average Annual Growth of the Electricity Maximum Demand by Control Region .............. 68

Figure 3. 10. Annual Growth Expected for the SEN’s Gross Consumption, 2017-2031 ......................... 70

Figure 3. 11. Average Annual Growth of the Electricity Gross Consumption by Control Region .......... 71

Figure 3. 12. Comparative of the Share in the Gross Consumption between 2016 and 2031 of the Different Control Regions .............................................................................................................................................. 72

Figure 3. 13. Share in the Additional Capacity by Type of Technology, 2017-2031 ............................... 74

Figure 3. 14. Behavior of the Capacity Additions by Technology, 2017-2031 .......................................... 74

Figure 3. 15. Share in the Additional Capacity by Modality, 2017-2031 ..................................................... 75

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Figure 3. 16. Capacity Additions by Control Region, 2017-2031 ................................................................... 77

Figure 3. 17. Electricity-Generation Capacity Withdrawal by Technology, 2017-2031 ......................... 79

Figure 3. 18. Comparative of the Installed Capacity by Type of Technology, 2016 y 2031 ................. 80

Figure 3. 19. Electricity-Generation Installed Capacity by Technologies 2031 .......................................... 80

Figure 3. 20. Comparative of the Share in the Total Generation by Technology, 2016 and 2031 .... 82

Figure 3. 21. Behavior and Share of Electric Power Generation by Regions of the SEN, 2017-2031 .. 83

Figure 3. 22. Fuel Consumption, 2017-2031......................................................................................................... 84

Figure 3. 23. Efficient Planning Reserve of the SIN .............................................................................................. 85

Figure 3. 24. Efficient Planning Reserve in Baja California and Baja California Sur .................................... 85

Figure 4. 1. Prospective Prices of Henry Hub Natural Gas, 2017-2031 ......................................................... 91

Figure 4. 2. Behavior of the Production and Import of Dry Gas, 2006-2016 ............................................... 92

Figure 4. 3. Demand of Domestic Natural Gas by Sectors, 2006-2016 ........................................................ 92

Figure 4. 4. Behavior of the Electric Power Capacity and Generation of Combined Cycle, 2006-2016 ................................................................................................................................................................................................ 93

Figure 4. 5. Expansion of Accumulated Capacity in Electricity Generation Plants (Base Scenario) ....... 98

Figure 4. 6. Differences between GN_0.5 Scenario and Base Scenario in Installed Capacity for Electricity Generation .......................................................................................................................................................................... 98

Figure 4. 7. Electricity Generation in the Base Scenario ....................................................................................... 99

Figure 4. 8. Electricity Generation in the Scenarios of NG Price Variation .................................................. 100

Figure 4. 9. Decrease in the NG Consumption regarding the Base Scenario .............................................. 101

Figure 4. 10. Behavior of the Capacity Factors of Combined-Cycle Plants ................................................ 101

Figure 4. 11. Optimized Expansion of the Capacity of the Electricity Transmission Lines .................... 102

Figure 4. 12. Greenhouse Gases Emissions in Electricity Generation ........................................................... 103

Figure 4. 13. Percentage of Clean-Energy Generation in the Different Scenarios ................................... 103

Figure 4. 14. Average Price of Electricity Weighted by Transmission Region in the SEN ....................... 105

Figure 4. 15. Average Weighted Price of Hourly Electricity in the SEN and Generation of Wind, Solar, and Hydropower Plants ............................................................................................................................................... 106

Figure A. 1. Electricity Generation Capacity Defined Externally in Balmorel ............................................ 122

Figure A. 2. Natural Gas Prices Range de in Mexico, According to the price of Natural Gas Forecasted for each Transmission Region 2017-2031 ........................................................................................................... 123

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Figure A. 3. Fuel Oil Prices Range de in Mexico, According to the price of Fuel Oil Forecasted for each Transmission Region 2017-2031 ............................................................................................................................ 123

Figure A. 4. Uranium Prices ....................................................................................................................................... 124

Figure A. 5. Diesel Price .............................................................................................................................................. 124

Figure A. 6. Coal Prices Range in Mexico, According to the price of Coal Forecasted for each Transmission Region 2017-2031 ............................................................................................................................ 124

Index of Maps

Map 2. 1. Map of the Electric National System ..................................................................................................... 33

Map 2. 2. Connection Capacity between the 53 SEN’s Transmission Regions 2016 ............................... 55

Map 2. 3. Cross-Border Interconnections................................................................................................................ 59

Map 4. 1. Map of the SEN’s Transmission Regions .............................................................................................. 94

Map A. 1. SEN’s Existing and Planned Transmission Lines up to 2024 ....................................................... 125

Map A. 2. Wind-Power Capacity Factors .............................................................................................................. 127

Map A. 3. Solar-Power Capacity Factors .............................................................................................................. 127

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Presentation

During the last years, Mexico’s economy has displayed, a positive behavior in a context of uncertainty and volatility and has become even stronger since the 2009 crisis. In order to achieve this, it was necessary to adopt a series of Structural Reforms which would foster every economic sector and move the country forward. In particular, the Energy Reform has been able, along with economic growth, to modernize the electric and oil industries with an increasing participation and investment of the private sector.

One of the greatest achievements of the Energy Reform during the present administration was to generate a little less than 18% of electricity from clean energies at 20% target; and in the coming two years, thanks to the Transition Energy Law, it is expected to reach almost 30%.

On the other hand, it has been possible to achieve some of the Energy Reform objectives due to the conclusion of the three Long-Term Electricity Auctions is expected to attract investments for 9 billion dollars; an addition to new capacity of 7,451 megawatts of clean generation, and the creation of the Universal Electricity Service Fund which will serve electricity to 1.8 million Mexicans currently living in extreme poverty and with no access to this basic service.

In line with these results, Mexico confirms its leadership role to combat climate change by diversifying its energy matrix with clean energies. Moreover, Mexico is now opening new possibilities to the private sector as well as strengthening the National Electric System, which will bring about benefits to the country and to its economic growth.

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Introduction

The Mexican Electricity Sector is undergoing a deep modernization process, and thanks to the Energy Reform, is firmly moving forward. As a result of the electricity auctions, today there is a larger investment in new clean electricity generation capacity which is expected to strengthen the National Transmission and Distribution Grid and, therefore, be able to serve the country’s needs for electricity and attaining greater economic dynamism.

The Electricity Sector Outlook 2017-2031 is a document of energy policy issued by the Secretariat of Energy (SENER, for its Spanish acronym), which presents the planning for the next 15 years based on the current situation of the Mexican electricity market and the new technology trends in the world.

This Outlook is divided into four chapters. The first one provides the legal and regulatory framework of the Mexican Electricity Market, which includes the most relevant aspects and results of the Energy Reform, its secondary legislation, and new instruments for the energy transition.

The second chapter displays a historical diagnosis of the Electric National System (SEN, for its Spanish acronym) of the last ten years (2006-2016). It also describes the main variables, such as the electricity domestic consumption, the demand’s seasonal behavior, median prices, and the existing infrastructure for generating and transmitting electric power. This information is the main basis for the future planning since it reflects the trends and main needs of the country in energy matters.

The third chapter describes the result of the planning exercise for the Development Program for the National Electricity System (PRODESEN, for its Spanish acronym) 2017-2031, which displays the future electricity generation capacity and the expansion required for the transmission grid to serve the expected demand.

Finally, Chapter Four presents a sensitivity exercise which allows a better understanding of the dynamics and trends of the Electricity Sector, and a thorough knowledge of the impact that some of the volatile variants have on the sector planning.

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Executive Summary

The Electricity Sector Outlook 2017-2031 is a document of energy policy that becomes an analytical tool for different users such as investors, researchers, scholars, and State Productive Enterprises which require general and specific information about the electricity sector. The main purpose of this document is to present a historical panorama of the Mexican electricity sector and its expectations for the foreseeable future.

Regulatory and legal framework of the Mexican Electricity Sector

The first chapter describes the main regulations and legal instruments governing the operations of the Mexican Electricity System. Likewise, it gives a brief description of how the Wholesale Electricity Market works.

Historical Diagnosis of the Electricity Sector

This chapter describes a brief diagnosis of the Electricity Sector for the period 2006-2016. In it is possible to identify the main components of the sector, such as electricity, installed capacity, gross generation, and expansion of the transmission and distribution lines during the last years, among other information.

Achieving a sustained growth of the Mexican economy requires a robust and reliable electricity sector that helps carrying out the production activities needed for the country’s development. Thus, during the decade 2006-2016, the GDP grew 2.4% annual average, and population, 1.2%, while electricity consumption grew by 2.6%.

By the end of 2016, 98.5% of the population had access to electricity services, increasing electricity sales by 2.8% (equivalent to 5,871 GW) regarding the previous year, standing out the industrial sector, which concentrated 57% of the total sales recorded during that year.

To supply the growing demand of electricity, the installed capacity of the electricity sector had an average annual growth rate (AAGR) of 2.9% during the last decade, raising from 56,317 MW in 2006 to 73,510 Mw in 2016, an increase of 17,194 MW. From what was reported in 2016, 71.2% from the total generating park corresponded to conventional-technology power plants, and the remaining 50.2%, to clean-technologies power plants.

By the end of 2016, electricity generation reached 319,363.5 GWh, with a large share from clean technologies: 20.3% of the total generation matrix. Stands out hydroelectric generation as the main clean energy, generating 30,909 GWh. Within the share of conventional technologies, combined cycle represented 50.2% of electricity generation, equivalent to 160,378 GWh.

Finally, the SEN’s transmission capacity in 2016 was of 74,208 MW, an increase by 4% regarding 2015. As for the National Interconnected System (SIN, for its Spanish acronym), its transmission capacity was of 72,450 MW, an increase of 2,756 MW. The Northeast region had the largest capacity, 18,670 MW, which represented an increase by 3% regarding 2015.

Electricity Sector Outlook

This chapter includes the results of the exercise published in the PRODESEN 2017-2031, which reflects the commitment of SENER to design and carry out the SEN’s energy policy and its planning. It takes as a reference the scenarios with a 15-year horizon from the Indicative Program for Commissioning and Decommissioning of Power Plants (PIIRCE, for its Spanish acronym), the Program for the Expansion and Modernization of the National Transmission Network, and Program for the Expansion and Modernization of the General Distribution Grids.

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The global energy panorama is changing and diversifying rapidly. The growing demand of electricity, mostly in developing countries of the Asian region, have fostered the sector’s expansion and technologies such as solar and wind power are growing very fast.

Macroeconomic forecasts are the most important variables for elaborating a planning exercise, since they are the main reference for identifying the country’s energy needs for the coming years. In Mexico, in the base scenario 2017-2031 is expected a GDP’s average annual growth of 2.9%, reaching 457,561 GWh by the end of the prospective period.

Between 2017 and 2031 there is expected an addition of 55,840 MW in electricity generation capacity, from which 37.4% correspond to conventional technologies (20,876 MW) and 62.2% to clean technologies (34,964 MW). The technologies with the largest contribution to the system are combined cycle with 33.9%, and wind power with 24.2%. By the end of the prospective period it is estimated the total decommissioning of 15,814 MW of generation capacity, related to the decommissioning of 137 units, mostly, from conventional technologies.

In 2016, electricity generation reached 319,364 GWh, from which 79.7% came from conventional technologies, and 20.3% from clean technologies. By 2031, electricity generation is expected to increase by 43.0% reaching 456,683 GWh, from which 54.1% will come from conventional technologies and 45.9% from clean technologies.

Sensitivity Exercise

Sensitivity exercises are aimed to provide a better understanding of the dynamics and trends of the Electricity Sector, as well as to delve into the impact of some of the variables’ volatility on the sector planning.

The exercise presented in this chapter “Study of the Long-Term Impact of Natural Gas Prices on the Electricity Sector” was devised using the Balmorel1 energy model in coordination with members of the Integrated System Modeling (SIMISE2, for its Spanish acronym), and the SENER. The purpose of the study is to present and assess the impacts derived from the uncertainty of the natural gas prices and their possible repercussions in the planning of the Mexican electricity sector, considering changes in capacity, electricity generation, and the expansion of the electricity transmission network, as well as their impact on the greenhouse gas emissions (GHG).

1 Open-source license ISC: http://www.balmorel.com/ 2 The Integrated System Modeling of the Energy Sector (SIMISE) contains databases and models for carrying out the main activities of the energy planning: macroeconomy, demand, supply, and demand supply optimization. It considers different regions and passages of time.

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1. Legal and Regulatory Framework of the Mexican Electricity Sector

Derived from the Energy Reform, the regulatory context of the Mexican Electricity Sector has become stronger in order to comply with the National Development Plan 2013-2018 and supply energy to the country with competitive prices, quality, and efficiency throughout the production chain3.

To make sure Mexico will fulfill the commitment undertaken and become an international reference, the group of laws, standards, and new regulations are subjected to continuous updates which will enable the optimal development of the Wholesale Electricity Market (MEM, for its Spanish acronym)migration into a global economy context. This market shall provide sufficient basis for an interrelation between the recently constituted state productive enterprise, the new participants from the private sector, and the supervision of the regulatory agencies.

This chapter will present the main regulations and legal instruments governing the operations of the Mexican Electricity Sector. Likewise, it gives a brief description of how the Wholesale Electricity Market works.

1.1. Regulatory Framework

The SEN is a strategic element for the country’s development. After the Energy Reform, the SEN has been restructured with a group of laws, regulations, standards, and manuals which contribute to its strengthening and bring about the necessary conditions for every sector to participate in it.

Following are described a series of legal and regulatory provisions governing the electricity system; it also identifies the importance of the institutions within the SEN’s planning activities:

FIGURE 1. 1. SEN’S REGULATORY FRAMEWORK

Source: Elaborated by SENER.

3 Objective 4.6. of the National Development Plan 2013-2018 (http://pnd.gob.mx/wp-content/uploads/2013/05/PND.pdf

Constitutional(December 20, 2013)

• Article 25, paragraph IV• Article 27, paragraph VI• Article 28, paragraph IV• Transitory articles:

• ThirdoTenthoEleventhoTwelfthoThirteenthoSixteenth, subparagraph

b)oSeventeenthoEighteenthoTwentieth

Legislative(August 11, 2014)

• Electric Industry Law Energy Transition Law Planning Law Law of the Coordinated

Regulatory Organs in Energy Matter

Law of the Federal Electricity Commission

• Law of Geothermal Energy

Regulations(October 31st, 2014)

• Regulation of the Electric Industry Law

Regulation of the Law of CFE

Internal Regulation of the SENER

• Regulation of the Law of Geothermal Energy

Administrative

• Rules of the Wholesale Electricity Market

Guidelines for issuing the Clean Energy Certificates

Interconnection Guidelines

Tariffs Standards• Manuals

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1.1.1. Political Constitution of the United Mexican States

Regarding electricity, the Energy Reform has as its main legal framework the amendments made to articles 25 and 274 of the Political Constitution of the United Mexican States. These amendments establish that the State, through the SENER, is in charge of carrying out the SEN’s Planning activities as follows:

FIGURE 1. 2. AMENDMENTS TO THE POLITICAL CONSTITUTION OF THE UNITED MEXICAN STATES IN ELECTRICITY MATTER


1.1.2. Electric Industry Law

The Electric Industry Law (LIE, for its Spanish acronym)5 was enacted on August 11, 2014 and is the result of strengthening the SEN’s Planning process, as a regulatory law of the Political Constitution of the United Mexican States. The LIE establishes a Free Competition Regime to generate and trade electric power, and it also includes the participation of private parties in the generation and distribution of public service with new contractual models establishing that, just as the SEN’s planning and control, are still activities exclusive to the State.


The purpose of the LIE is to regulate the planning and control of the SEN, the Public Service of Electricity Transmission and Distribution and all related activities of the electric industry, in addition to promote the sustainable development of the electric industry and ensure its continuous, efficient, and safe operation to benefit users, as well as the compliance with the obligations of public and universal service of clean energies and pollution emissions reduction.

Within the LIE’s main provisions there are the faculties bestowed upon the authorities, such as the SENER, the Energy Regulatory Commission (CRE, for its Spanish acronym), and the National Energy Control Center

4 Enacted on December 20, 2013 and published in the Official Journal of the Federation (DOF). 5 http://dof.gob.mx/nota_detalle.php?codigo=5355986&fecha=11/08/2014

Art. 25

• …”The public sector shall exclusively be in charge of those strategic areas established in Article 28,paragraph fourth of the Constitution. The Federal Government shall at all times keep ownership and controlover agencies and public productive corporations that have been established. In the case of planning andcontrol of the national power system, the public power transmission and distribution systems, as well as theexploration and exploitation of oil and other hydrocarbons, the Nation shall be empowered to carry onthose activities pursuant to paragraphs sixth and seventh of Article 27 of this Constitution.”

Art. 27

• …” The Nation shall exclusively carry out the planning and control over the national electric system, andover the power transmission and distribution utilities. No concession shall be granted in these activities,notwithstanding the power of the State to execute contracts with private parties in accordance with thelaws, which shall determine the ways in which private parties may participate in all other activities relatedto the electric power industry.”

Article 11, Electric Industry Law:

• “The Secretariat of Energy is authorized to: … III. Conduct the process of planning and elaborate theDevelopment Program for the National Electricity System.”

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(CENACE, for its Spanish acronym), for the planning and control of the SEN and other activities related to the electricity sector, as shown in the following figure:

FIGURE 1. 3. LIE MAIN PROVISIONS


Wholesale Electricity Market

The LIE also establishes the constitution of a Wholesale Electricity Market (WEM, for its Spanish acronym) with the main purpose of bringing transparency to the transactions between the participants of the electric industry. This Market will operate based on the SEN’s physical characteristics and will be subjected to what is planned in the Market Rules.

Within the Market it will be possible to sign electricity coverage agreements to realize buy/sell operations related to electricity, power, or the connected services in a nodule of the SEN, between Generators, Traders, and Qualified User participating in it. Figure 1.4. describes the WEM’s structure6.

6 For further detail, see: http://www.cenace.gob.mx/MercadoOperacion.aspx

Law of the Electric Industry

Of the Authorities

The SENERis authorized to:

-Establish, lead, and coordinate the country’s energy policy in matter of electric power.

-The coordination of the performance assessment of the CENACE and the MEM.

The CRE is authorized to: -Regulate and grant electricity-generation permits and models of interconnection agreements.- Issuing of the MEM’s basis and surveillance of its operation.

The CENACE will be the MEM’s operator, will review and update its operating provisions.

-Carry out auctions for signing electricity coverage agreements between the generators and the representatives of the load centers.

Of the Planning and Control of the SEN

The SENER will develop indicative programs for installing and decommissioning Power Plants, whose relevant aspects will be incorporated into the Development Program of the National Electric System.

The State will exercise the Operating Control of the SEN through the CENACE, which will determine the elements of the National Transmission Grid and General Distribution Networks as well as their operation corresponding to the MEM.

Of the different Activities of the SEN

Of Electric-Power

Generation

Power Stations with capacity ≥ 0.5 MW and Power Stations of any size represented by a Generator in the Electricity Wholesale Market require a permit granted by the CRE to generate electricity.

Of the Transmission

and Distribution

The State, through the SENER, Transporters, and Distributors can associate or sign agreements with private parties for carrying out, on behalf of the Nation, among other, the financing, installation, maintenance, management, operation, and expansion of the infrastructure necessary to provide the T&D Public Service.

Of Trading

Trading comprises the provision of Electricity Supply to End Users; represent Exempt Generators in the Wholesale Electricity Market; purchase T&D services based on Regulated Tariffs, among other.

Article 96. Electric Industry Law

•The Market Rules will establish procedures which will allow to perform, at least, buy/sell transactions of:

•Electric power;- Connected services included in the WEM;- Power or any other product which warrants the sufficiency of the resources to serve the electricity demand;- The products mentioned above, through import or export;- Financial Transmission Rights;- Clean Energy Certificates; and•Other products, collection rights, and penalties required for the efficient functioning of the SEN.

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FIGURE 1. 4. WHOLESALE ELECTRICITY MARKET


To follow up on the planning and operation activities of the WEM, the following Market Manuals7 have been published:

Long-Term Auctions Manual Account statement, Invoicing, and Payments Manual Guarantee of Compliance Manual Resolution of Controversies Manual Bequeathed Interconnection Agreements Manual Short-Term Energy Market Manual Market Information System Manual Registry and Accreditation of Market Participants Manual Assignation of Bequeathed Financial Rights Manual Power-Balance Market Manual Interconnection of Generating Stations with Capacity of less than 0.5 MW Manual Manual of Bilateral Transactions and Registry of Electricity Coverage Agreements

Regulation of the Electric Industry Law

The Regulation is intended to establish the provisions which regulate the operational planning and control of the SEN, as well as the activities to generate, transmit, distribute, and trade of the electric industry. For the elaboration of the PRODESEN, the Regulation shall consider, at least, the following:

7 For further detail, see: http://www.cenace.gob.mx/Paginas/Publicas/MercadoOperacion/ManualesMercado.aspx

• Per year for the immediate prior year.

• At least once a year starting in 2018.

• Electricity (Day ahead, Real time, Hour ahead).

• Connected Services (Reserve: regulating, rolling, non-rolling, supplemental rolling; and non-rolling supplemental.

• Financial Transmission Rights Auctions (per year, three years, monthly).

• Medium and Long-Term Auctions (Energy, Power, and CELs).

Auctions Short-Term Market

Power Balance Market

Market of Clean Energy Certificates

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FIGURE 1. 5. PLANNING ELEMENTS AND CONTROL OF THE SEN


The regulation of the LIE, in its Article 9, establishes the incorporation of mechanisms to gather the opinion of Market Participants and interested parties in developing projects of electric infrastructure in the terms defined by the Secretariat in order to elaborate the expansion and modernization programs of the National Transmission Network and the General Distribution Grids. Likewise, the prior programs shall be considered during this process, as well as the works and investments in course of execution as shown below:

FIGURE 1. 6. CONSIDERATIONS FOR ELABORATING THE PROGRAMS OF EXPANSION AND MODERNIZATION OF THE NATIONAL TRANSMISSION NETWORK AND THE GENERAL

DISTRIBUTION GRIDS


Development Program for the Sustainable Use of Energy(PRODESEN)

Electricity demand forecasts and the prices for the electric industry primary inputs;

Coordination of the indicative programs for commissioning and decommissioning of Power Stations with the development of the programs to expand and modernize the National Transmission Network and the General Distribution Grids;

Policy of Reliability established by the Secretariat;

Indicative programs for commissioning and decommissioning of Power Stations which foreseen the infrastructure needed to ensure the Reliability of the Electric National System;

Coordination, along with the planning of the National Gas-Pipeline Network’s expansion program and the promoting mechanisms of Clean Energies, and

Comprehensive cost-benefit analysis of the varied alternatives of expansion and modernization of the National Transmission Network and the General Distribution Grids.

Programs of Expansion and Modernization of the National Transmission Network and the General Distribution Grids

The programs will be elaborated annually and will have a 15-year projection.

The CENACE or the Distributors, as corresponding according to article 14 of the Law, will suggest the programs to the Secretariat and the CRE in February of each year, without prejudice to submitting special programs in other months in order to advance the startup of priority projects.

The CRE will issue its opinion to the Secretariat within a period of 30 working days starting the day the programs were received.

The Secretariat, when appropriate, will authorize the programs within a period of 30 working days starting the day of receipt of the CRE’s opinion.

The Secretariat, when appropriate, will authorize the programs within a period of 30 working days starting the day of receipt of the CRE’s opinion.

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Once the programs referred to in this article are authorized, the Secretariat will publish the PRODESEN by May of each year8.

1.1.3. Energy Transition Law

The Energy Transition Law (LTE, for its Spanish acronym) is aimed to regulate the sustainable use of energy as well as the obligations in matters of clean energies and reduction of pollutant emissions from the electric industry, maintaining competitiveness in the production sectors (see Figure 1.7).

As supporting mechanisms, the LTE establish as instruments for planning the energy national policy in matter of clean energies and energy efficiency, the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels, the Special Program of Energy Transition (PETE, for its Spanish acronym), and the National Program for the Sustainable Use of Energy (PRONASE, for its Spanish acronym), which should be revised annually by the SENER, the CRE, the CENACE, and the National Commission for the Efficient Use of Energy (CONUEE, for its Spanish acronym).

The LTE entrusts the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels to set the Goals in order to meet the electricity consumption through a portfolio of alternatives which include Energy Efficiency and a growing proportion of clean generation, in conditions of economic feasibility.

FIGURE 1. 7. MAIN OBJECTIVES OF THE ENERGY TRANSITION LAW


8 For further detail, see http://www.dof.gob.mx/nota_detalle.php?codigo=5366665&fecha=31/10/2014

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1.1.4. Planning Law

Establishes the guidelines and main principles for conducting the National Development Plan and the National System for Democratic Planning. Likewise, and according to article 4 of the Law, the Federal Executive is in charge of leading the national development planning.

1.1.5. Law of the Coordinated Regulatory Organs for the Energy Matters

The Law of the Coordinated Regulatory Organs for the Energy Matters establishes the grounds for the organization and functioning of the Coordinated Regulatory Organs, which are the National Hydrocarbons Commission (CNH, for its Spanish acronym) and the CRE. In such way, and to foster a competitive and efficient energy sector, the State will be in charge of the technical and economic regulation in matters of hydrocarbons and electricity through these entities.

1.1.6. Law of the Federal Public Administration (LOAPF)

Article 3 of the LOAPF points out the SENER is in charge of establishing, conducting, and coordinating the country’s energy policy. Thereby, the SENER shall prioritize the energy security and diversification, as well as energy saving and environmental protection. This same article, in its Section V9, endows the SENER to carry out the energy planning in the short and long-term, an activity which should consider the criteria of sovereignty and energy security, progressive reduction of the environmental impacts from the production and consumption of energy, a larger share of renewable energies, energy saving, and a better efficiency of its generation and use, among other.

1.1.7. Law of the Federal Electricity Commission

The Law of the Electricity Federal Commission (CFE) regulates article 25, fourth paragraph, of the Constitution, and of the Thirteenth Transitory of the Decree whereby it is amended and added various provisions of the Political Constitution of the United Mexican States, in Energy Matters. It is aimed to regulate the organization, administration, functioning, operation, control, evaluation, and accountability of the State Productive Enterprise CFE.

Some of the main attributions of CFE are to serve, under the terms of the applicable legislation, the public service of electricity transmission and distribution, on behalf and order of the Mexican State (see Figure 1.8).

9 For further detail see http://www.diputados.gob.mx/LeyesBiblio/pdf/153_190517.pdf

Article 2, Law of the Electricity Federal Commission:

• “The CFE is a State Productive Enterprise exclusive property of the Federal Government, with its own legalpersonality and patrimony, and which will enjoy technical, operational, and management autonomy…”

26

FIGURE 1. 8. ACTIVITIES OF CFE


1.2. Electricity Sector Planning Instruments and Policies

The Energy Reform meets the country needs for energy to ensure a larger supply of fuels at the best prices. After the modernization and strengthening of institutions, regulatory entities, and the new state productive enterprise, its becomes necessary a series of planning instruments and policies which contribute in a new design of the Electricity Sector.

Below are some of the instruments and policies which will bring about the necessary grounds for an efficient Electricity Sector with competitive prices that will enable the development of the country.

1.2.1. Transition Strategy to Promote the Use of Cleaner Technologies and Fuels

The Transition Strategy to Promote the Use of Cleaner Technologies and Fuels is a planning instrument that governs the national policy in the medium and long term in matter of clean energies, sustainable use of energy, improvement in energy productivity, and the economic feasibility of pollutant emissions reduction. It was developed based on consulting mechanisms established after the constitution of the Consultative Council for Energy Transition (CCTE, for its Spanish acronym) on April 7, 2016, in accordance of the LTE’s mandate, and which created four Working Groups:

The generation divided into units and trade of electricity and associated products, including their import and export, according to the Law of the Electric Industry, and under terms of the strict legal separation established by the Secretariat of Energy;

Import, export, transportation, storage, buy and sell of natural gas, coal, and any other fuel;

The development and execution of projects on engineering, research, geological and geophysical activities, supervision, service provision to third parties, as well as any other related to the generation, transmission, distribution, and trading of electricity and other activities part of its purpose;

Research, development, and implementation of energy sources which will enable the compliance with its purpose, in accordance with the applicable provisions;

Research and technological development required for the activities of the electric industry, trading of products and technological services resulting from these research, as well as the training of highly-specialized human resources;

Use and management of real estate, industrial property, and technology available to serve or provide any additional service such as, including, but not limited to, construction, leasing, maintenance, and telecommunications. The CFE might guarantee and grant guarantees in favor of third parties;

Acquisition, tenure, or share in the asset composition of partnerships with a purpose similar to or compatible with its own purpose; and

Rest of the activities needed for the comprehensive execution of its purpose.

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1. Energy Production

2. Energy Consumption

3. Energy Efficiency

4. Energy Storage

One of the main components is to establish goals and obligations on clean energies and energy efficiency. Thereby, the Strategy establishes goals, as shown in Figure 1.9, in order to satisfy electricity consumption through a portfolio of alternatives that includes Energy Efficiency and a growing proportion of clean-energies generation, in conditions of economic feasibility.

FIGURE 1. 9. PERCENTAGE OF CLEAN GENERATION IN THE TOTAL ELECTRICITY GENERATION


The Strategy shall contain a long-term component for a 30-year period which define the scenarios suggested for achieving the Goals on clean energies and the Goal on energy efficiency. It will also include a medium-term planning component for a 15-year period that should be updated every three years, once it has already been executed what is disposed in the corresponding article with regard to the long-term component.

1.2.2. Auctions of the Electricity Market

Articles 10 and 11 of the Regulation of the LIE determine is the CRE the responsible of establishing the basis in the Electricity Market and the criteria to be observed by the CENACE in the auctions carried out to buy power. In addition, they establish these auctions could not limit the technology which contributes with the technical solution required by the CENACE. Hence, power auctions shall be subjected to the following terms:

2018:

25%

2024:

35%

2050:

50%

28

FIGURE 1. 10. PROCESS OF ELECTRICITY AUCTIONS


With the results of the first three long-term electricity auctions, it will be reached the national target of having at least 35% of electricity from green sources by 2024.

The process of the First Long-Term Electricity Auction of the Wholesale Electricity Market, which began in 2015, ended on March 2016, in accordance with the activities schedule foreseen in the Tender Procedures.

The verdict assigns the long-term coverage agreements to 11 companies, which submitted the 18 winning proposals. These proposals competed with 69 participants, which represented a total of 226 proposals. The winner companies were Aldesa Energia Renovable, Consorcio Energia Limpia 2010, Enel Green Power, Energia Renovable Peninsula, Energia Renovable del Istmo II, Jinksolar Investment, Photoemeris Sustentable, Recurrent Energy Mexico, Sol de Insurgentes, SunPower Systems, and Vega Solar.

In the first auction, SENER reported to have served a demand of 5,380,911 clean energy certificates, which represents 84.9% of CFE’s initial request; as well as 5,402,880.5 MWh of energy, 84.9% of the original demand.

The auctioned energy is equivalent to 1.9% of Mexico’s annual generation, with projects of 18 to 500 MW that will be installed in Yucatan, Coahuila, Guanajuato, Tamaulipas, Jalisco, Aguascalientes, and Baja California Sur.

The Second Electricity Auction was carried out on September 2016, with the participation of 57 bidders, from which 23 were the winners with 56 proposals for solar photovoltaic power, wind power, and other clean energies.

There shall be a period, determined by the CENACE, between the date of the call’s issuing and the act of receipt of proposals and opening of technical offers, and which will not exceed 90 days to let the interested parties make the necessary technical, financial, and economic studies to compose their proposals and carry out the

clearing meetings.

The CRE will evaluate and, if the case, approve the auction terms within 30 working days, and

The CENACE will take into consideration the comments received and will incorporate the ones it deems appropriate.

The CENACE shall publish the preliminary terms in its website at least 10 working days prior to the date of the auction, for the purpose of receiving comments.

The CENACE should devise the auction’s preliminary terms which will contain, at least: the power to be auctioned; the technical requirements to ensure the reliability; the specifications for the submittal of the economical proposal; the methodology to assess the participants in the auction procedure; the model of

agreement, and the terms and stages of the auction procedure.

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It is worth mentioning that this auction will bring an investment of 4 billion dollars to install 2,871 MW of new installed capacity of clean energies. The average price of clean energy was of 33.47 dollars per MWh, a highly competitive price at international level, 30% less than what was obtained in the first auction.

Meanwhile, CFE presented two winner proposals for clean-technology stations: Geothermal Power Plant los Azufres III Phase II, located in Michoacan; and the Combined-Cycle Power Plant Agua Prieta II, in Sonora. Each year, both plants will provide around 199 thousand Clean Energy Certificates (CELs, for its Spanish acronym) and 199 thousand MWh of power.

Thus, as a result of the two contests for buying electricity in the long term, 34 companies will be established throughout the national territory for all the clean energies participating, with a joint investment of 6,600 million dollars which will add almost 5 thousand MW of clean generation capacity.

From the Third Electricity Auction, whose verdict was announced by the CENADE and the SENER on November 2017, one of the most affordable prices was obtained: 20.57 dollars per MWh, and it is expected an investment of nearly 2,400 million dollars to construct 15 new clean-energy power stations in eight states, adding 2,256 MW of electricity generation capacity to the SEN.

Just like in the other two auctions, CFE will buy Energy, Power, and CELs to the winning generators. However, for the first time, la Auction was opened to different buyers which, as the Load Responsible Entities, submitted buying purchase offers for the three electric products.

1.2.3. Issuing of Clean Energy Certificates

In its article 3, section VIII, the LIE defines the CELs as a title issued by the CRE granting the production a defined amount of electric power from clean energies, and with which the requirements associated to the consumption of load centers are complied.

FIGURE 1. 11. CHARACTERISTICS OF THE CLEAN ENERGY CERTIFICATES


The Certificates are an instrument for fostering new investments into clean energies and allow the transformation of national targets on clean generation into individual obligations, in an efficient and affordable way for the country.

The percentage is defined from a quotient, where the numerator corresponds to the estimate of clean generation from: a) clean electric power stations operating since August 11, 2014; b) bequeathed power stations operating before August 11, 2014 (as long as they have executed a project to increase their production of clean energy); and c) clean power stations with a capacity that has been excluded from a Bequeathed Interconnection Agreement to be included in an Interconnection Agreement in the terms of the Electric Industry Law. And the denominator corresponds to the estimate on electricity consumption subtracting the consumption of clean energy from the bequeathed power stations which do not operate in the terms of the Electric Industry Law.

Clean Energy Certificates

One CEL supports the generation of 1 MWh of

clean electricity.

As the CELs are an instrument of the market, they do not have a fixed price, since it depends on the demand and supply.

Clean technologies, as defined in Art. 3 of the LIE, have the right to receive

CEL for its considered energy.

The participants obliged to consume CELs are

described in Art. 123 of the LIE.

30

Thus, under the guidelines established by the Criteria for Granting Clean Energy Certificates and the Requirements for its Acquisition, considering the national targets on clean generation, the existing power stations, the ones under development, available resources, and the estimates of electricity consumption for a 15-year planning period.

FIGURE 1. 12. REQUIREMENTS OF CLEAN ENERGY CERTIFICATES RELATED TO THE CORRESPONDING OBLIGATION PERIODS

Source: Elaborated by SENER

1.3. Of the Devise of the Electricity Sector Outlook

The document of the Electricity Sector Outlook is a tool for the Electricity Sector Planning and complies with the mandate of the LOAPF in its Article 33, Section V, and Article 24 of the Internal Regulation of the SENER.

The information contained in the Electricity Sector Outlook is organized in two horizons: historical and prospective. The historical information is obtained from different sources such as the Energy Information System (SIE, for its Spanish acronym), CRE, CENACE, CFE, and information provided by the Undersecretariat of Electricity.

Regarding the prospective information, a substantial element in this planning document, is based on PRODESEN 2017-2031, issued by the Secretariat of Energy, and a planning instrument of the SEN for the generation, transmission, and distribution activities with a 15-year horizon.

2018 •5.0%

2019 •5.9%

2020 •7.4%

2021 •10.9%

2022 •13.9%

Article 24, Section XIV, Internal Regulation of the SENER

• “Of the faculties of the General Directorate of Energy Planning and Information... Devise and submit to theapproval of the hierarchical superior, the outlook projects in the medium and long term of theenergy sector, which include electricity, natural gas, liquefied petroleum gas, oil, and oil products,with a planning horizon of minimum 15 years.”

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2. Historical Diagnosis of the Electricity Sector

The Mexican Electricity Sector has undergone a transformation during the last years. The most significant change was going from a monopolistic model to a free-competency model, where all its participants have equal participation opportunities. Thus, in the face of the growing needs of the Mexican population, this new model has been efficiently adapted to an expanding economy and with greater challenges to achieve the energy stability and safety required by the country.

This chapter presents a brief diagnosis of the Mexican Electricity Sector for the period 2006-2016 that identifies the main components of the sector, such as the consumption of electricity, installed capacity, gross generation, and the expansion of the transmission and distribution lines during the last years, among other information.

2.1. Mexican Economy Analysis

In the face of a weaker international economic environment, a series of structural reforms have been carried out aimed to bring stability to the country. Particularly, the energy reform introduced important changes in the structure and operation of the Mexican energy sector, since it allowed the participation of the private sector in the exploration, development, production, transformation, and trading of hydrocarbons, as well as in the generation, transmission, distribution in the case of the electric industry.

In the last years it has been observed a panorama of modest international growth and a general stagnation of trade. At the same time, the drop of oil prices weakened the businessmen expectations to invest in the energy sector, reducing thus oil revenues which represented only 16.3% of the public sector total income by the end of 201610.

During all 2016 and the first semester of 2017, the Mexican economy has faced significant challenges which have risked the macroeconomic stability in recent times. Just like: currency exchange depreciation, the US elections results, inflationary pressures, large increases in the Central Bank interest rates, the normalization process of rates in the US, the fall in manufacturing exports, among other. Despite the latter, our economy still has strong foundations to increase its growth within the coming years.

Achieving a sustained growth of the Mexican economy requires a robust and reliable electricity sector which allows to carry out all the productive activities necessary for the country’s development. Thereby, to identify how much energy was required by the population in a defined period, it is necessary to understand the behavior of the main macroeconomic variables related to the electricity sector, and consequently, analyze the future growth expectations.

As it is shown in Table 2.1., between 2006 and 2016 Mexico displayed an average growth of 1.2% in its population, reaching 122.3 million people in 2016. The Mexican exchange rate has constantly depreciated regarding the American dollar. By the end of 2016, it reached 18.4 Mexican pesos per American dollar, -0.13% regarding 2015. These increases have consequences in the foreign trade, in the production, and in the exchange rate market, as is the case of the purchase of imported hydrocarbons.

10 Oxford Economics Mexico & Latin America.

32

TABLE 2. 1. MAIN MACROECONOMIC VARIABLES OF MEXICO11, 2006-2016 (Different units)

AAGR: Average Annual Growth Rate Source: SENER with information from INEGI.

Regarding the growth in economic activity, measured through the Gross Domestic Product (GDP), recorded an average annual growth rate (AAGR) of 2.4% during 2006-2016. The economic growth in the last years was almost exclusively promoted by private consumption, supported by low inflation, workers’ remittances, credit expansion, higher real salaries, and employment creation in the formal sector.

In 2015, the GDP grew 2.5%, far below the Government’s expectations stated in the General Criteria of Economic Policy. In 2016, the economy presented performances below the objectives, and grew only 2.3%. The electricity sector represented about 2% of the Mexican GDP, and 6.1% of the industrial activity.

The National Consumer Price Index (INPC12, for its Spanish acronym), is a statistical instrument to measure inflation and which is closely related to electricity prices. An increase on the energy prices impact varied production sectors, increasing the cost of goods and services. As shown in Figure 2.1, during the period 2006-2016 this index was in decline.

FIGURE 2. 1. MACROECONOMIC VARIABLES OF MEXICO, 2006-2016 (Annual Variation)

Source: SENER with information from INEGI.

2.2. Electric Power Users and Tariffs

The SEN is organized in nine regions which are the National Interconnected System (SIN, for its Spanish acronym), and the isolated systems of Baja California and Baja California Sur. Besides, it considers the small

11 These values were considered for the planning exercise 2017-2031, and correspond to what the INEGI published in 2016, as the last year estimated. Therefore, they might not coincide with the date published in 2017. 12 An economic index commonly used, and which is aimed to measure the price variation through time of a fixed basket of goods and services that represents the household consumption (see http://

Macroeconomic Variable

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 AAGR

Population (million people)

108.4 109.8 111.3 112.9 114.3 115.7 117.1 118.4 119.7 121.0 122.3 1.2

GDP (billion pesos 2008)

11,718.7 12,087.6 12,256.9 11,680.7 12,277.7 12,774.2 13,287.5 13,468.3 13,770.7 14,110.1 14,455.2 2.4

Average exchange rate (pesos per dollar)

10.9 10.9 11.1 13.5 12.6 12.4 13.2 12.8 13.3 15.8 18.4 4.9

Consumer prices (average annual variation percentage)

3.6 4.0 5.1 5.3 4.2 3.4 4.1 3.8 4.0 2.7 2.6 -3.7

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP Average exchange rate Consumer prices

33

isolated systems13. The operation of these nine regions is in charge of the eight control centers located in the cities of Mexico, Puebla, Guadalajara, Hermosillo, Gomez Palacio, Monterrey, and Merida; the two regions of Baja California are managed from Mexicali (see Map 2.1).

MAP 2. 1. MAP OF THE ELECTRIC NATIONAL SYSTEM

Source: PRODESEN 2017-2031

2.2.1. Electric-Power Users

In 2016, 98.5% of the population had electricity14. The CFE served nearly 40.8 million customers, which had an average annual growth rate above 5.8% during the last 10 years. By the end of 2016, the Residential Sector concentrated 88.6%, seconded by the Commercial Sector with 9.8%; the Industrial, 0.8%; Services, 0.5%; and Agricultural, 0.3% of the total (see Figure 2.2).

FIGURE 2. 2. USERS’ SHARE BY SECTOR, 2016 (Percentage)

Source: SENER with information from CFE.

13 The isolated systems are: Baja California, Baja California Sur, and Mulege. 14 Sectorial Objective 4, Country Report 2016.

Residential88.6%

Commercial9.8%

Industrial0.8%

Services0.5%

Agricultural0.3%

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The SEN has increased its number of users at an AAGR of 2.6% since 2006, going from 31.9 million to 40.8 million users, that is 8.9 million new users throughout 10 years. The Northeast region has displayed the largest growth rate in the decade, 8.1%, that was an addition of 1.9 million users in 2016, to reach 4.0 million users. This increase is the result of a growing economic development strengthened by the commercial and industrial activity of the region.

Between 2006 and 2016, the Peninsular and the Baja California regions grew 4.3% and 4.0%, respectively, covering a total of 3.1 million electricity users. Likely, the Eastern and Northern regions displayed an AAGR of 3.3%, each, while Baja California grew 2.8%; the Central region, 2.4%, adding up 22.9 million users.

Different from other regions, the Northwest region reduced its number of users in 2.0 million between 2015 and 2016, displaying a rate of decrease of 3.5% during the decade (see Table 2.2).

From the 40.8 million users recorded in 2016, the Eastern region had the largest share with 10.4 million users, equivalent to 25.4%; seconded by the Western region with 24.2%, and the Central region with 21.4%, as shown in Figure 2.3.

TABLE 2. 2. ELECTRICITY USERS BY OPERATIONAL AREA (Million users)

* Baja California Sur: System La Paz and Mulege. Source: Elaborated by SENER with information from CENACE.

FIGURE 2. 3. USERS’ SHARE BY ELECTRICITY-OPERATIONAL AREA, 2016 (Percentage)

1 System La Paz and Mulege. Source: Elaborated by SENER with information from CENACE.

Region 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 AAGR

Central 7.1 7.1 7.2 7.3 7.3 7.6 7.9 8.1 8.4 8.6 9.1 2.4%Eastern 7.6 7.9 8.3 8.6 8.8 9.1 9.3 9.6 9.9 10.2 10.4 3.3%Western 8.5 8.9 9.1 9.4 9.7 8.7 8.9 9.2 9.4 9.7 9.9 1.7%Northwest 3.0 3.2 3.3 3.4 3.5 3.6 3.7 3.7 3.8 3.9 2.0 -3.5%North 1.5 1.6 1.7 1.7 1.8 1.8 1.8 1.9 1.9 2.0 2.1 3.2%Northeast 1.8 1.8 1.9 1.9 1.9 1.9 1.9 2.0 2.0 2.1 4.0 8.1%Peninsular 1.1 1.2 1.3 1.3 1.4 1.4 1.5 1.5 1.6 1.7 1.7 4.3%Baja California 1.1 1.1 1.1 1.2 1.2 1.2 1.2 1.3 1.3 1.3 1.4 2.8%Baja California Sur 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.3 4.0%SIN 30.6 31.7 32.7 33.6 34.3 34.0 35.0 36.0 37.0 38.1 39.1 2.5%SEN 31.9 33.0 34.1 35.0 35.7 35.5 36.5 37.5 38.5 39.7 40.8 2.6%

Central22.4%

Eastern25.4%Western

24.2%

Northwest4.8%

North5.1%

Northeast9.7%

Peninsular4.3%

Baja California3.3%

Baja California Sur

0.7%

35

By federal entities, the State of Mexico and the City of Mexico concentrated 19.1% of the total electricity users; this is due to the high population density15 of the Valley of Mexico and to the zone’s important economic activity. The entities with less use

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