From State Monopoly to Competition: Energy Reform in Mexico

Francisco Xavier Salazar Diez de SollanoChair, Energy Regulatory Commission

Crown Plaza Hotel, Jerusalem, November 30th, 2015

Industrial organization in the energy sector in Mexico before

the Reform

Pre-1992 market structure in the electric sector

Final usersCFE

In Situ Generation

TransmissionGeneration MarketingOperation Distribution

Market structure in the electric sector from 1992-2014

Final users

Generation by CFE

Imports by CFE

IPPCFE

Small Generators

CHP

Direct Imports

Self Supply (remote)

In Situ Generation

Own CFE

Own CFE

TransmissionGeneration MarketingOperation Distribution

State Exclusivity (“Public Service”)

Own CFE

From 1996 to 2014: Capacity development [GW]

Installed capacity, 1996 = 36 GW Installed capacity, 2015 = 66.0 GW

>78% of expansion was carried out by private sector

From 1996 to 2014: Energy production [TWh]

Generation, 1996 = 155.6 TWh Generation, 2014 = 301.3 TWh

Private generation ismore efficient

Accumulated private investment

Generation scheme Permits Investment US$ Billion

IPP 30 $15.36

Self Supply 467 $18.24

CHP 100 $4.15

Exports 7 $2.24

In-Situ Generation 36 $0.56

Small Generators 105 $6.67

Imports 43 $0.02

Total (08/2014) 788 $47.23

Market structure in natural gas before 1995

Storage

Service Stations

Distribution

Gas Well

Oil Well Refining

Gas Processing

Imports

Transport Transport

Final users

Upstream

Midstream

DownstreamKeys:Keys:

PipelinesPipelinesLNG/CNGLNG/CNGClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Market structure in natural gas from 1995-2014

Storage

Service Stations

Distribution

Gas Well

Oil Well Refining

Gas Processing

Imports

Transport Transport

Final users

Upstream

Midstream

DownstreamKeys:Keys:

PipelinesPipelinesLNG/CNGLNG/CNGClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Pipeline infrastructure in 1995

National Pipeline System (SNG)

Naco-Hermosillo Pipeline (SNH)

Total: 8,704 km

Naco-Hermosillo

Pipeline

Naco-Hermosillo

Pipeline

National Pipeline System

National Pipeline System

Pipeline infrastructure by 2014

SNG + SNH Extension: 8,920 km

Private development: 2,761 km

Total: 11,681 km

The handicaps of the previous energy model

Average prices of electricity for industrial and domestic end users: Mexico vs. USA

Source: IEA

Impact of the subsidy to the electric utility (CFE)

Source: CFE

Rate problems: level & structure example (2008 electric rates study)

Source: CRE

Natural gas demand, local production and reserves

Source: Pemex, CRE, SIE

Natural gas demand, local production and reserves

Source: EIASource: Pemex, CRE, SIE

Natural gas demand, local production and reserves

~10x!

Source: EIASource: Pemex, CRE, SIE

The New Model:institutional framework

Previous institutional arrangement

Executive Branch

Secretaries(Ministries)

SHCP(Treasury)

SENER(Energy Ministry)

CRE

CNH

Descentralized Entities

PEMEX

CFE

Symbology:Symbology:Policy MakerPolicy MakerRegulatorRegulatorOperatorOperator--- Autonomous --- Autonomous agencyagency

New institutional arrangement

Bank of Mexico

Mexican Oil Fund

Executive Branch

Secretaries(Ministries)

SHCP(Treasury)

SENER(Energy Ministry)

SEMARNAT(Environment

Ministry)

ASEA(Safety & EP

Agency)

Descentralized Entities

CENACE(Electricity market

ISO)CENAGAS

(Gas market Transco)

State Owned Productive Companies

PEMEX and affiliates

CFE and affiliates

Coordinated Independent Regulators

CRE

CNH

Symbology:Symbology:Policy MakerPolicy MakerRegulatorRegulatorOperatorOperatorFinancial EntityFinancial Entity--- Autonomous --- Autonomous agencyagency

COFECE(Competition

authority)

CRE’s strenghtening as measured by Gilardi’s Index

Before After

Status of the agency head 0.50 0.79

Status of the Board 0.50 0.79

Relationship with Government & Congress

0.84 1.00

Financial and organizational autonomy

0.58 0.88

Regulatory competences 0.25 0.75

Description of the reform(hydrocarbons)

Private investment opportunities before the reform (natural gas)

Storage

Service Stations

Distribution

Gas Well

Oil Well Refining

Gas Processing

Imports

Transport Transport

Final users

Upstream

Midstream

DownstreamKeys:Keys:

PipelinesPipelinesLNG/CNGLNG/CNGClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Private investment opportunities after the reform (natural gas)

Storage

Service Stations

Distribution

Gas Well

Oil Well Refining

Gas Processing

Imports

Transport Transport

Final users

Upstream

Midstream

DownstreamKeys:Keys:

PipelinesPipelinesLNG/CNGLNG/CNGClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Storage

Service Stations

Distribution

Retail (Other)

Gas Well

Oil Well Refining

Gas Processing

Imports

Private investment opportunities before the reform (petroleum products)

Transport Transport

Final Users

Upstream

Downstream

Keys:Keys:

PipelinesPipelinesOtherOtherClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Midstream

Storage

Service Stations

Distribution

Retail (Other)

Gas Well

Oil Well Refining

Gas Processing

Imports

Private investment opportunities after the reform (petroleum products)

Transport Transport

Final Users

Upstream

Downstream

Keys:Keys:

PipelinesPipelinesOtherOtherClosed to private Closed to private

investmentinvestmentOpen to private Open to private

investmentinvestment

Midstream

Basic characteristics of the regulatory framework

• Transitory assymetric regulation imposed on Pemex as a dominant player in all markets: - Vertical unbundling- Price controls- Mandatory open access- Market caps

• Regulation for other players according to market characteristics

• Pemex pipelines transfered to CENAGAS, who will also act as independent operator of the “integrated” system

• Stricter regulation:- Mandatory open seasons

(limits to proprietary pipelines)

- Use it or loose it principle- Electronic bulletin boards- Regulated tariffs

• Lighter regulation. Flexibility on:- Vertical integration - Proprietary

infrastructure- Open seasons- Tariffs

• More flexibility on infrastructure linked to upstream and storage

• Less on LPG, pipelines and airport infrastructure

General Natural gas Others

Principles for regulation of prices and rates

• Competitive sectors are not regulated ex-ante (hands off policy). Anticompetitive behavior sanctioned by COFECE (Competition Authority).

• Incumbent prices are regulated based on opportunity cost (netback to relevant markets).

• Rates for networks and essential facilities regulated based on incentive schemes• Competition for the market is preferred over rate setting (when public bids are an

alternative, CRE reviews and approves the terms of reference).• Rates are reviewed every 5 years but initial CAPEX and ROE are maintained.

Additional investments and OPEX are evaluated during the corresponding rate case.

• Regulated ROE is set based on CAPM methodology updated every year (country & market risk series). Debt level approved according to the project.

• Assets base as well as O&M are subject to benchmarking.

Description of the reform(electricity)

Previous market structure: 1992-2014

Final users

Generation by CFE

Imports by CFE

IPPCFE

Small Generators

CHP

Direct Imports

Self Supply (remote)

In Situ Generation

Own CFE

Own CFE

TransmissionGeneration MarketingOperation Distribution

State Exclusivity (“Public Service”)

Own CFE

New market structure: vertical unbundling (legal separation)

Final users

CFE Generation

IPP (old)

Small Generators (old)

Self Supply (old)

CHP (old)

Imports

New Generators

In Situ & Isolated Generation

TransmissionGeneration MarketingOperation Distribution

Cenace

(ISO)

CFE Transmission

+ contracts with

privates

CFE Distribution

+ contracts with

privatesOthers

CFE Marketing

Horizontal unbundling: legal separation in generation; legal or accounting in distribution

CFE Generation

Generation Distribution

CFE Distribution

CFE Genco 1

CFE Genco 2

CFE Genco 3

CFE Genco n (4-5)

CFE Distco 1

CFE Distco 2

CFE Distco 3

CFE Distco n (14-16)

Private contract 1

Private contract n

Basic characteristics of the electricity wholesale market

Market

Transmission and distribution

Supply Demand

Products

Basic characteristics of the electricity wholesale market

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Supply

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

• Aggregation is possible

Supply

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

OthersSupply

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

OthersSupply

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Supply

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others Demand

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Threshold:•D ≥3 MW, 08/2014•D ≥2 MW, 08/2015•D ≥1 MW, 08/2016•Afterwards defined by Ministry•Optional for existing users•Mandatory for users after 08/2014

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Small users

Supply Demand

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Supply

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others Demand

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Transitory users

Small users

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Transitory users

Small users

Clean energy obligationsSupply Demand

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Transitory users

Small users

Demand response

Demand responseSupply Demand

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Transitory users

Small users

Demand response

Demand response

Transmission & distribution

Supply Demand

Brokers

Generators

Basic characteristics of the electricity wholesale market

Brokers

Basic serviceretailers

Power plants(≥0.5 MW)

Dist. generation (<0.5 MW)

CEC (REC) & FTR holders

Products

Ancillary services

Capacity

Energy

FTR

REC (CEL)

Others

Last resource LSE

Basic serviceretailers

Qualified retailers

Qualified users

Transitory users

Small users

Demand response

Demand response

Transmission & distribution

Supply Demand

Brokers

Market players & transactions:Energy

Generator Broker LSE Qualified User

Day ahead market Yes Yes Yes Yes

Hour ahead market Yes Yes Yes Yes

Real time market Yes No Yes Yes

Medium term auctions

Yes Yes Yes Yes

Long term auctions Yes No Yes Yes

Bilateral contracts Yes Yes Yes/No (Basic) Yes

Market players & transactions:Clean energy certificates

Generator Broker LSE Qualified User

Day ahead market Yes Yes Yes Yes

Hour ahead market Yes Yes Yes Yes

Real time market Yes Yes Yes Yes

Long term auctions Yes No Yes Yes

Bilateral contracts Yes Yes Yes/No (Basic) Yes

Market players & transactions:Capacity

Generator Broker LSE Qualified User

Medium term auctions

Yes Yes Yes Yes

Long term auctions Yes No Yes Yes

Bilateral contracts Yes Yes Yes/No (Basic) Yes

Market players & transactions:Ancillary services

Generator Broker LSE Qualified User

Day ahead market Yes Yes Yes Yes

Hour ahead market No No No No

Real time market Yes Yes Yes Yes

Bilateral contracts Yes Yes Yes Yes

Market players & transactions:Financial transmision rights

Generator Broker LSE Qualified User

Initial allocation Yes No Yes No

Short term auctions

Yes Yes Yes Yes

Medium term auctions

Yes Yes Yes Yes

Long term auctions Yes Yes Yes Yes

Bilateral contracts Yes Yes Yes Yes

Funding Yes No Yes Yes

Demandincrease

Gross pool with day ahead and real time market for imbalances

Nodal pricing scheme with financial transmission rights41

42

31

1

2

3

4

5

6

7

8

9

101

1

12

13

141

5161

718

19

20

21 2

223

24

28

25

26

27

29

30

40

32 3

3 34

35

36

37

38 3

9

1 Sonora Norte2 Sonora Sur3 Los Mochis4 Sinaloa5 Mazatlán 16 Juárez7 Moctezuma8 Chihuahua9 Camargo10 Laguna11 Durango12 Coahuila13 Monterrey14 Bravo15 Lajas Güemes16 Champayán17 Anáhuac18 La mesa19 Huasteca20 Tamos21 Tuxpan22 Oriente23 Central24 Laguna Verde25 Veracruz26 Sureste

27 Puebla28 Acapulco29 Petacalco30 Balsas31 Colima32 Tepic33 Occidente34 Querétaro35 Santa Lucía36 Campeche37 Yucatán38 Valladolid39 Cozumel40 Chetumal41 Mexicali42 La Paz

400 kV line230 kV line115 kV line34.5 kV line

CECs: t-3 requirement and carryover scheme

Cost of penalty

Requirements Supply

Spot market without carryover Carryover effect in the spot market

Accumulated CECs

Deferred requirements

Other features of the regulatory framework for electricity

• CRE will establish capacity requirements• Capacity mechanisms can include auctions and scarcity

pricing• Transmission and distribution will be subject to long term

planning and expansion bids• Energy and CECs for small users will have to be acquired

through competitive processes (auctions)• Open access to grid is mandatory• Distributed generation and smart grids will be regulated by

CRE

fsalazar@cre.gob.mxwww.cre.gob.mx

Thanks!