Wholesale Energy Market Expectations (WEM)

Mexico, despite being one of the largest economies in Latin America, does not stand out for its great sporting achievements, development, or educational system. Instead, Mexico does stand out for negative issues such as violence and corruption. We are even better known for an infamous Mexican who stole the winning quarterback’s jersey in a Super Bowl, more shame than glory.

Nevertheless, one thing that made many Mexicans think positively was the Energy Reform. Regarding the power topic, the creation of the Wholesale Energy Market (WEM) that, according to a 2017 ECC presentation, “Challenges and Milestones of the Energy Reform: The ECC Perspective”, Mexico aspires to have in 2050 a 50% generation capacity through clean energy and public & private investments totaling more than $242 billion dollars.

Although the Mexican electricity system was initially private, in the 1960s the transition to a controlled, operated and state-owned system took place. Over the years the union-government structure led to an inefficient, insufficient system with large investment needs. Hence at the beginning of this century, the birth of private investment schemes with exclusive sales to CFE took place. CFE maintained the monopoly dictated by the Mexican laws of the time.

In 2013, after many failed attempts, the “Energy Reform” was born and approved, and with it the creation of the Wholesale Energy Market (WEM). Although WEM is one of the fundamental pillars of the reform, little is known and understood of it. WEM would have to have a big impact on the daily life of all Mexicans.

WEM is under the supervision of the CENACE (National Center of Energy Control), which is responsible for implementing the legal framework developed by the ECC (Energy Compliance Commission). Although the ECC is an institution with many years of existence, it is increasingly acquiring capabilities as a compliance institution for all energy issues. The new ECC comes directly from the new Electricity Law, which will allow it to maintain a balance with the new energy market participants.

To explain the operation of the WEM we must start with the generators, which can offer their energy today in a virtual market where other participants of this market will be able to buy it. There are also commercial players who are intermediaries between those who sell and those who buy energy, they can sell or buy the rights of the generators taking advantage of the cost market of this wholesale market.

On the other hand, there are suppliers that are companies that have direct contact with energy consumers at all levels and who can have direct contact with power generators in search of the best trade agreements for all the parties.

This is not a Mexican model, but one based on international best practices, which allows three types of suppliers: Qualified, Basic and last resource. The first type of supplier covers large industrial consumers who make intensive use of electricity consumption; the second type covers all the small consumers, that is, small business, public facilities and domestic ones; and finally, the supplier of last resource is the one that replaces any of the two previous ones in case of technical incapacity to fulfill his commitment established in the market, with the purpose of maintaining a reliable operation of the national electrical system.

The WEM has operated from 2016 to 2018, with the rules established in this law and adjusting continuously on a learning curve sometimes beneficial and sometimes painful, for each and every one of the participants in this market – including the government. The past victory in 2018 of a socialist party in Mexico has changed the perspective of investors and the WEM participants themselves, given the news of the Mexican government’s interest in returning and favoring power generation through public investment and limiting private investment to future and current projects.

While it is necessary that public policies seek economic and industrial development, the energy transition should not be set aside. Delaying laws or policies against climate change is threatening the future of Mexicans and the world. This is the current challenge for Mexico, the use of these renewable generation technologies requires changes in the operation models of the power grid that directly affects the CENACE operation centers that depend on the strengthening of the different power grids in the country. The refusal to use private capital, for ideological reasons, is the path to technological and budgetary limitations that in the end could affect the development and economical life of the country due to the increase in energy costs.

Considering the flood of information about the development plan in energy matters for the next few years – including cancellation of public tenders and long-term auctions, as well as the intention of the government to invest in highly polluting fuel generation projects, the WEM has continued to grow with the emergence of interconnection and compliance regulations for all these market participants in all its modalities. Starting from the operation of the electrical system, through the energy transmission and distribution, to the final consumers, the so-called “Grid Code (Código de Red)”, clearly establishes the guidelines that each interested party in participating in this market has to meet technically.

Recently the Mexican government has changed the message, probably based on the knowledge that the development of a renewable energy matrix depends on the construction of large transmission lines that imply large investments that, at this time, the Mexican government could not do on its own. If the government decides to be pragmatic and pay attention to the country’s real energy needs, they would accept the coexistence of private competition in investment and operation of power generation plants. The Mexican government could even go beyond and open other WEM areas, such as transmission and distribution. If Mexico would use of all the mechanisms of the energy reform, it could be a resounding and profound success for this presidential period, in spite of everything.

Within the Energy Sector in Mexico, the expectation of opportunity is as great as the fear of its failure. The political cost of an ineffective and inefficient WEM does not compare with the financial impact an inefficient WEM would have on the Mexican economy. There is still a high risk, but the market trend, as well as the voices of international experts who trust that the WEM will adjust over time, suggest that the WEM is fulfilling the mission for which it was created. The WEM can generate true competition in the power industry in Mexico, which can finally offer clean energy at a lower price to final consumers.