1. Call for Papers – Economics of Energy & Environmental Policy

2. 11 Editions since its first volume in 2012

3. Reforming the Mexican Electricity Market: Design and Regulatory Issues   Juan Rosellón CIDE, DIW Berlin and Universidad Panamericana
USC Mexico’s Studies Chair 2017
34th USAEE/IAEE North American Conference
October 23-26, 2016
Tulsa, Oklahoma, USA

4. Outline New industry and institutional structure Critical issues
Market design
Nodal prices, FTRs and subsidies
Transmission and renewable integration
Implications for policy making in Mexico

5. Outline New industry and institutional structure Critical issues
Market design
Nodal prices, FTRs and subsidies
Transmission and renewable integration
Implications for policy making in Mexico

7. Diagnosis: Energy Tariffs
Vertientes de la Reforma
Average CFE tariff was 25% superior to the average tariffs in USA.
Without subsidies, the difference was of 73%
Source: Energy Information Administration – EIA (USA)
USA Tariffs converted to pesos considering MXP/USD, daily average from the first trimester of 2013.

8. Diagnosis: CFE Vertientes de la Reforma
CFE’s assets are rapidly declining; reaching negative net assets in 2014.
Source: CFE Financial Statements; Finance Division 2012 of CFE

9. Pre-Reform Industry Structure
Vertientes de la Reforma
Public
Service
CFE Dispatch
PIEs
Self Supply

10. New Industry Structure
Generation
System Control and Electric Market
Retailing
Consumption
Short Term Transactions
Unregulated Supply
Qualified Users
Subsidiary “A”
Spot Market
Subsidiary “B”
Basic Service Users
Subsidiary “C”
Private Parties
Long Term Contracts
Regulated Supply
Auctions
and Contracts
and Contracts
Transmission
Distribution

11. Generation Subsidiaries 1 Transmission Subsidiary
CFE´s Transformation
Horizontal Unbundling
Unbundling for:
Promoting Competition.
Reducing barriers to entry.
Increase operational efficiency and reduce costs.
Guaranteeing economical viability of CFE in the long run.
Vertical Unbundling
Generation Subsidiaries
Subsidiary for PPA
1 Affiliate for CIL
1 Transmission Subsidiary
Private Participation is allowed
1 Distribution Subsidiary
1 Subsidiary for Basic Service Supply
1 Affiliate for Qualified Supply

12. Power Market Instruments
Vertientes de la Reforma
Market
Periodicity
Market Type
Energy and Ancillary Services
Daily, Hourly
Cost Based
Capacity
Yearly
Unrestricted offers with administered price caps
Clean Energy Certificates
According to CRE Requirements
Unrestricted offers
Financial Transmission Rights
Yearly (monthly in second stage)
Auctions and Long Term Contracts
CRE will set the requirements for all suppliers to contract forward energy and associated products.
Basic Service Retailers may only contract forward through auctions operated by CENACE.
All market participants can participate in the auctions.

13. Neutral Energy Planning
Vertientes de la Reforma
Before
Now
POISE
PRODESEN
CFE
SENER
Proposes
Indicative generation
(Stakeholders)
SENER
CENACE
Authorizes
Transmission
CFE
CRE
Executes
Opinion
SENER
Publishes G T D
Market
CFE + Regulated Private Participants
CFE + Private Participants

14. FTRs: General Characteristics
Vertientes de la Reforma
Objectives
Allow market participants to reduce exposure to congestion prices.
Assure that generators face correct signals to build and operate plants.
Preserve legacy rights.
Avoid restricting efficient dispatch.
Features
Allocation process for Grandfathered FTRs.
General auctions for new FTRs.
Special FTR mechanism linked to new construction.
CENACE will only award FTRs up to the capacity of the network.

15. Renewable Energy Potential
Clean Energy Potential in Mexico
Solar Resources
Wind Resources
Geothermal Resources
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.
Renewable Energy Potential
Installed Capacity
2° semester 2014
(MW)
Actual Generation
Year 2013
(% of total GWh)
+ Proven Resources
+Probable Resources
+Possible Resources
Wind
1900
1.38%
5.30%
34.80%
Geothermal
823
2.04%
2.22%
22.52%
40.03%
Solar 64
0.01%
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%

16. 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).
Transmission in US and Canada expands faster than demand growth.
Expansion in Mexico should become more aggressive.

17. New Institutional Framework
Generation
Control/Dispatch
Transmission
Distribution
Marketing
Final Rates
Expansion Plan
Expansion Plan
Generator Interconnection
Dispatch Rules
Pre-Reform
Generation “Modality”
Participate in Final Rates
Reliability Standards
Approve Expansion Plan
Approve Expansion Plan
Participate in Final Rates
Permits
Operation of Short and Long Term Markets
System Operation
Planning and Interconnection Studies
Reform
Requirements for Clean Energy
Initial Market Rules
Minimum consumption to be Qualified User
Approve expansion plan
Contracting Requirements
Reliability Standards
Regulated Tariffs
Svc. Quality Requirements
Administer CEC’s
Market Monitor
Supervision of Interconnection
Final Rates (Basic Service)

18. Implementation plan Electricity Market Transmission and Distribution
2014
2015
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Electricity Market
CENACE .
Creation Decree
Model
Contracts
Electric Market
Operation
Resolution
Certification
First Market Rules
Rules
Transmission and Distribution
Regulated Rates
Resolution
Universal Service
Fund Creation
National Electric System Development Program
Program
Electric Industry
Bylaws
Restructuring of CFE
Bylaws
Legal Separation
Terms of Separation CFE
Resolution
Clean Energy
Clean Energy Guidelines
Basic Service Auctions
Resolution
Operation
Clean Energy Requirements
Resolution
Responsibility:
SENER
CRE

19. Outline New industry and institutional structure Critical issues
Market design
Nodal prices, FTRs and subsidies
Transmission and renewable integration
Implications for policy making in Mexico

20. Liberalization of Generation Markets
Market Design
Liberalization of Generation Markets
Horizontal integration in generation markets under a dominant incumbent (CFE)
How to accomplish a level-playing-field to allow fair competition?
Potential collusion of CFE’s plants
Arms’ length separation
Merit order pricing under CFE plants’ regulation

21. Liberalization of Generation Markets
Market Design
Liberalization of Generation Markets
Spot, one-day ahead, long-term capacity and bilateral generation markets
IPP’s, self-supply, cogeneration old schemes and the new electricity market
Existence of IPPs with long-term contracts of energy sales to CFE
Basic Service’s auctions and CECs

22. Market Design Vertical Integration Open access enforcement
Access pricing
Auctions of transmission and distribution projects
Prelude of future privatization?

23. ISO’s and regulatory capture
Market Design
ISO’s and regulatory capture
ISO’s corporate governance and regulation (CENACE)
Structure of incentives for the ISO
Is CENACE a profit-maximizing or welfare-maximizing dispatch entity?
Really independent?
CFE capturing the regulator (CRE)?

24. Market Design Distribution CFE’s basic-service to (captive) consumers
Cross subsidies
Role of private marketers (suministradores)

25. Outline New industry and institutional structure Critical issues
Market design
Nodal prices, FTRs and subsidies
Transmission and renewable integration
Implications for policy making in Mexico

26. Nodal prices, FTR Auctions and Subsidies
Transition to nodal prices starting from a confusing regressive subsidy scheme
Free allocations of FTRs to smooth out revenue or cost shocks (distributive efficiency)
Grandfathered FTRs (legados)
FTR auctions?
Lump-sum subsidies in a now progressive scheme
Subsidies carried out by the finance ministry (Hacienda) and not by the Energy authorities

27. Kunz, F. , K. Neuhoff and J. Rosellón (2014)
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.

30. Outline New industry and institutional structure Critical issues
Market design
Nodal prices, FTRs and subsidies
Transmission and renewable integration
Implications for policy making in Mexico

31. Transmission Expansion
Optimal regulation of the transmission network
The Prodesen’s planning process: stages
Does Prodesen converge to welfare optimality?
Auctions of transmission projects
Transmission CRE’s tariff regulation
Application of an incentive mechanism to promote the efficient regulation of the operation and expansion of the Mexican networks?
Is there room for incentive transmission-tariff regulation?

33. Nodal-price developments in Mexico (2015-2023)

34. Transmission Expansion and Renewable Integration
Time resolution, and supply and demand fluctuations of a renewable integration process
Hourly time resolution to substantially increase the applicability of regulatory mechanisms
Price-cap incentive HRV regulation is still superior to cost-plus regulation

35. Transmission Expansion and Renewable Integration
Rationality of transmission investment under a dynamic process of renewable generation 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

36. Outline New industry and institutional structure Critical issues:
Market design
Nodal prices, FTRs and subsidies
Transmission expansion and renewable integration
Implications for policy making in Mexico

37. 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 adequate property rights which incent efficient investments
Research results with potential to be applied in actual public-policy making: CEPG