Reforming the Mexican Electricity Market: Design and Regulatory
Issues
Juan Rosellón DIW Berlin and CIDE
1 Berlin Conference on Energy and Electricity Economics (BELEC 2015)
28-29 May, 2015
Outline
1. New industry and institutional structure
2. Challenges: – Market design under the assumptions of the
energy reform
– Introduction a nodal-price system and FTR auctions
– Transmission network expansion and large-scale renewable integration
3. Implications for policy making in Mexico
2
Outline
1. New industry and institutional structure
2. Challenges: – Market design under the assumptions of the
energy reform
– Introduction a nodal-price system and FTR auctions
– Transmission network expansion and large-scale integration renewables
3. Implications for policy making in Mexico
3
Generation System Control and
Electric Market
Qualified Users
Basic Service Users
Consumption Retailing
Private Parties
Regulated Supply
Long Term Contracts
Spot Market
Auctions
Short Term Transactions
New industry structure ANEXO MEM.PPTX
and Contracts
Transmission Distribution
Unregulated Supply
Subsidiary “B”
Subsidiary “A”
Subsidiary “C”
and Contracts
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New institutional framework
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Pre
-Refo
rm
Re
form
Approve Expansion Plan
Permits
Generation “Modality”
Minimum consumption to be Qualified User
Market Monitor
Requirements for Clean Energy
Contracting Requirements
Administer CEC’s
Reliability Standards Svc. Quality Requirements
Final Rates (Basic Service)
Final Rates
Participate in Final Rates
Participate in Final Rates
Dispatch Rules
Reliability Standards
Expansion Plan Expansion Plan
Generator Interconnection
Approve Expansion Plan
Operation of Short and Long Term Markets
System Operation
Planning and Interconnection Studies
Regulated Tariffs
Approve expansion plan
Marketing Control/Dispatch Transmission Generation Distribution
Supervision of Interconnection
Initial Market Rules
Clean energy potential in Mexico
Renewable Energy Potential
Installed Capacity
2° semester 2014
(MW)
Actual Generation
Year 2013
(% of total GWh)
Actual Generation
+ Proven Resources
Actual Generation
+ Proven Resources
+Probable Resources
Actual Generation
+ Proven Resources
+Probable Resources
+Possible Resources
Wind 1900 1.38% 5.30% 5.30% 34.80%
Geothermal 823 2.04% 2.22% 22.52% 40.03%
Solar 64 0.01% 0.65% 0.65% 2,189.40%
Mini Hydro 419 0.54% 1.72% 9.48% 24.35%
Total 3206 3.97% 9.89% 37.95% 2,288.59%
• Mexico has sufficient resources to exceed its goals of 35% non-fossil generation in 2024, 40% in 2035 and 50% in 2050.
• Portfolio standard will assure that they can be developed.
Solar Resources Wind Resources Geothermal Resources
6
Opportunities for transmission investment
Existing Program: In the 15 year plan, CFE has included 19.3 billion USD of transmission projects including 19,555 circuit-km of lines.
Planning: Expansion plan will be proposed by an independent entity with a mandate to promote open access (CENACE).
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Tran
smis
sio
n (
c-km
)
De
man
d (
GW
)
Demand Growth vs. Transmission Expansion
Demand
Transmission
85% growth
18% growth
• Transmission in US and Canada expands faster than demand growth.
• Expansion in Mexico should become more aggressive.
Implementation plan
Electricity Market
Transmission and
Distribution
Electric Industry
2014 2015 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
First Market Rules Rules
Electric Market Operation
Clean Energy
Universal Service
Fund Creation
CENACE . Creation Decree
National Electric System Development Program
Program
Model Contracts
Resolution
Regulated Rates Resolution
Bylaws Bylaws
Certification
Clean Energy Guidelines
Resolution
Clean Energy Requirements
Resolution
Basic Service Auctions
Operation
Terms of Separation CFE
Resolution
Restructuring of CFE Legal Separation
CRE SENER Responsibility: 8
Outline
1. New industry and institutional structure
2. Challenges: – Market design under the assumptions of the
energy reform
– Introduction a nodal-price system and FTR auctions
– Transmission network expansion and large-scale renewable integration
3. Implications for policy making in Mexico
9
Challenges
• Key issues related to the implementation of the of the Mexican electricity reform.
• Optimal design of an electricity market driven by the assumptions of the energy reform, e.g., network expansion, horizontal and vertical integration, ISO’s corporate governance.
• Implementation of a nodal pricing system and introduction of financial transmission rights (FTRs).
• Optimal regulation of the transmission network to promote large-scale integration of renewables.
10
First issue: Electricity market design under the assumptions of the energy reform
• First problem: horizontal competition in the generation subsector under a dominant incumbent (CFE): – And under the existence of IPPs with long-term contracts of
energy sales to CFE
– How to accomplish a level-playing-field to allow fair competition?
• Second problem: regulation of the transmission network: – Application of an incentive mechanism to promote the efficient
regulation of the operation and expansion of the Mexican networks.
• Third problem: corporate governance and regulation of the independent system operator (CENACE): – What would be the structure of incentives for the ISO? Would
be a profit-maximizing dispatch entity? Or welfare-maximizing? 11
A combined merchant-regulatory mechanism Rosellón, J. and H. Weigt (2011), “A dynamic incentive mechanism for transmission expansion in electricity networks – Theory, modeling
and application”, The Energy Journal, 32(1), 119-148.
Upper level problem: Profit maximizing Transco:
s.t.
Regulatory constraint
ISO welfare maximization:
Line capacity restriction
Energy balance
Plant capacity restriction
s.t.
Lower level problem:
T
t ji
ttt
i
ti
ti
ti
ti
FkijkcNFgpdp
,,)(max
1 1 1
( )
1( )
t w t w t t
i i i i
i
t w t w t t
i i i i
i
p d p g F N
RPI Xp d p g F N
,, ,0
max ( )d
tid
t t t
i i i id g
i t i t
W p d d mc g
i,tggt,
i
t
i
max
ijkpf tij
tij
tidqg ti
ti
ti ,
13
MAPA 2. Zonas congestionadas en México
Fuente: Elaboración propia con base en mapa de la SENER (2008).
14
Second issue: Introduction to the Mexican electricity market of a nodal-price system and
FTR auctions
• Transition to nodal prices starting from
subsidized prices
• Model to study initial free allocations of FTRs to smooth out revenue or cost shocks (distributive efficiency)
• Grandfathered FTRs
16
Market clearing
min𝐺
𝑚𝑐𝑝𝐺𝑝 ,𝑡
𝑝 ,𝑡
𝑑𝑛 ,𝑡
𝑛
− 𝐺𝑝 ,𝑡
𝑝
− 𝑔𝑛 ,𝑡𝑅𝐸𝑆
𝑛
= 0
0 ≤ 𝐺𝑝 ,𝑡 ≤ 𝑔𝑝𝑚𝑎𝑥
Congestion management
min𝐺𝑈𝑃 ,𝐺𝐷𝑂𝑊𝑁 ,Δ
𝑚𝑐𝑝(𝐺𝑝 ,𝑡𝑈𝑃 − 𝐺𝑝 ,𝑡
𝐷𝑂𝑊𝑁 )
𝑝 ,𝑡
𝑑𝑛 ,𝑡 − 𝑔𝑝 ,𝑡 + 𝐺𝑝 ,𝑡𝑈𝑃 − 𝐺𝑝 ,𝑡
𝐷𝑂𝑊𝑁 − 𝑔𝑛 ,𝑡𝑅𝐸𝑆
𝑝∈𝐴 𝑛
− 𝑏𝑛 ,𝑛𝑛Δ𝑛 ,𝑡
𝑛𝑛
= 0
0 ≤ 𝐺𝑝 ,𝑡𝑈𝑃 ≤ 𝑔𝑝
𝑚𝑎𝑥 − 𝑔𝑝 ,𝑡
0 ≤ 𝐺𝑝 ,𝑡𝐷𝑂𝑊𝑁 ≤ 𝑔𝑝 ,𝑡
ℎ𝑙 ,𝑛Δ𝑛 ,𝑡
𝑙
≤ 𝑝𝑙𝑚𝑎𝑥
Δ𝑛′ ,𝑡 = 0
Kunz, F., K. Neuhoff and J. Rosellón (2014). "FTR Allocations to Ease Transition to Nodal Pricing: An Application to the German Power System," Discussion Papers of DIW Berlin 1418, German Institute for Economic Research.
17
FTR allocation
min𝐺
𝑚𝑐𝑝𝐺𝑝 ,𝑡
𝑝 ,𝑡
𝑑𝑛 ,𝑡 − 𝐺𝑝 ,𝑡
𝑝∈𝐴 𝑛
− 𝑔𝑛 ,𝑡𝑅𝐸𝑆 − 𝑏𝑛 ,𝑛𝑛 Δ𝑛 ,𝑡
𝑛𝑛
= 0
0 ≤ 𝐺𝑝 ,𝑡 ≤ 𝑔𝑝𝑚𝑎𝑥
ℎ𝑙 ,𝑛Δ𝑛 ,𝑡
𝑙
≤ 𝑝𝑙𝑚𝑎𝑥
minΔ
𝜀
𝐹𝑇𝑅𝑛𝐷
𝑛
− 𝐹𝑇𝑅𝑛𝑅𝐸𝑆
𝑛
− 𝐹𝑇𝑅𝑝𝐺
𝑝
= 0
𝐹𝑇𝑅𝑛𝐷 − 𝐹𝑇𝑅𝑛
𝑅𝐸𝑆 − 𝐹𝑇𝑅𝑝𝐺
𝑝∈𝐴 𝑛
− 𝑏𝑛 ,𝑛𝑛 Δ𝑛 ,𝑡
𝑛𝑛
= 0
𝑐𝑟𝑡𝑇𝑆𝑂 − 𝑝𝑟𝑖𝑐𝑒𝑠𝑙𝑎𝑐𝑘 ,𝑡 − 𝑝𝑟𝑖𝑐𝑒𝐴 𝑛 ,𝑡 𝐹𝑇𝑅𝑝
𝐺
𝑝
− 𝑝𝑟𝑖𝑐𝑒𝑠𝑙𝑎𝑐𝑘 ,𝑡 − 𝑝𝑟𝑖𝑐𝑒𝑛 ,𝑡 𝐹𝑇𝑅𝑛𝑅𝐸𝑆
𝑛
− 𝑝𝑟𝑖𝑐𝑒𝑛 ,𝑡 − 𝑝𝑟𝑖𝑐𝑒𝑠𝑙𝑎𝑐𝑘 ,𝑡 𝐹𝑇𝑅𝑛𝐷
𝑛
= 0
ℎ𝑙 ,𝑛Δ𝑛 ,𝑡
𝑙
≤ 𝑝𝑙𝑚𝑎𝑥
Δ𝑛′ ,𝑡 = 0
18
No FTR allocation Full FTR allocation
Average change in surplus of demand in the high wind winter week under production-based allocation approach
19
Third issue: Optimal incentive regulation of the transmission network and large-scale renewable
integration
Schill, W.-P., J. Egerer, and J. Rosellón (2014), “Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating
Demand and Wind Generation.” Journal of Regulatory Economics. Online First. http://dx.doi.org/10.1007/s11149-014-9260-0
Issue 3.1: Transmission expansion under renewable integration of with time resolution and supply and
demand fluctuations
• Understanding how to regulate and expand transmission networks under large-scale renewable integration in Mexico.
• Include fluctuating renewable energy with hourly time resolution so as to substantially increase the applicability of regulatory mechanisms.
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Lower level as in Hogan et al. (2010), but with more time resolution:
, ,
1 2
4 5
, , , , , , , , , 1, , ,
0, , ,, ,
,
, , , 1, , ,
,
,
, , , 2, , ,
,
, , ,
1max ( )
1
. . 0 ( ) , ,
0 ( ) , ,
n tq
n t n t n t s s n t tq g
t T n N s Sp s
l n
n t l t l t
n l t
l n
n t l t l t
n l t
n s t n
s
p q dq c g
Is t P l t
X
IP l t
X
g B
, , , , , , ,
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0 ( ) , ,
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0 ( ) , ,
nn nn t n t n t
nn
n s t n s n s t
n n t n t
q p n t
g g n s t
slack n t
Upper level as in Rosellón and Weigt (2011):
, , , , , , , , , , 1
1max
1n t n t n t s n t t l l tt t
pt T n N s S l L tt t
p q p g fixpart ec ext
s.a.
, 1, , , , 1, , , , 1
n N
, , , , , , , , ,
n N
1
HRV
n t n t n t s n t t
s S
HRV
n t n t n t s n t t
s S
p q p g fixpart
RPI X
p q p g fixpart
1 ,
1
(1 )CostReg CostReg
t l l tt t
l L tt t
fixpart ec ext r fixpart
22
Comparison of welfare and extension results
HRV much closer to wf-optimum in all cases robust!
Fluctuating demand and wind power both increase the gap between wf-max and the regulatory cases.
-20%
0%
20%
40%
60%
80%
100%
Sta
tic
DRes
WindR
es
Sta
tic_t10
DRes
_t10
WindR
es_t
10
DRes
_250
DRes
_500
DRes
_100
0
Sta
tic_x
4
DRes
_x4
WindR
es_x
4
Sta
tic_e
r
DRes
_er
WindR
es_e
r
HRV NoReg CostReg
Ten regulatory periods Higher extension
costs
More wind Endogenous line
reactance
Figure 17: Social welfare gain of extension compared to WFMax for different model runs
23
Third issue: Optimal incentive regulation of the transmission network and large-scale renewable
integration
Egerer, J., J. Rosellón and W-P. Schill (2015), “Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion,” The Energy Journal, Vol. 36 (4)
Issue 3.2: Transmission expansion under the dynamic transformation of the generation park towards
renewables • Rationality of transmission investment under a
dynamic process of renewable integration. • Transmission investment under gradual substitution of
conventional energy (e.g., coal or fuel oil) with renewables (wind, solar or geothermal energy).
• Diverse developments of the technological mix in the generation park that implies different network congestion scenarios.
24
Table 1: Welfare changes relative to the case without extension
Weights Static Temporarily
increased
congestion
Permanently
increased
congestion
Permanently
decreased
congestion
1 2 3 4
WFMax 0.29% 1.28% 11.62% 0.00%
NoReg 0.00% 0.00% 9.25% 0.00%
CostReg 0.00% 1.27% 9.22% 0.00%
HRV Laspeyres 0.25% 1.01% 9.02% -0.17%
Paasche -0.11% 0.38% 9.39% -0.32%
Average Lasp.-Paasche
0.29% 0.89% 9.21% -0.32%
Ideal 0.29% 1.28% 11.62% 0,00%
26
Outline
1. New industry and institutional structure
2. Challenges: – Market design under the assumptions of the
energy reform
– Introduction a nodal-price system and FTR auctions
– Transmission network expansion and large-scale renewable integration
3. Implications for policy making in Mexico
27
Implications for policy making in Mexico
• Analysis of allocative, productive and distributive efficiencies in the electricity sector.
• Increase in economic welfare. • Efficient integration of renewable energies into
transmission networks (with consequent reduction of greenhouse emissions).
• Efficient expansion of transmission networks. • Nodal-price systems and financial hedging mechanisms
that grant adeaquate property rights which incent efficient investments
• Research results with potential to be applied in actual public-policy making: CIDE-CRE academic agreement (Rosellón, 2008): – Policy decisions in the natural-gas industry regulatory reform
back in 1995. 28