Jeff Thomas Pavlovic managing director of electric industry coordination at the Mexican Ministry of Energy speaks with Christopher Cooper about the market’s liberalisation
A new wholesale market operated by the CENACE will allow the national grid to be open to all the market participants. Describe your vision for exico’s new wholesale electricity market.
The wholesale power market is being designed with two main goals in mind. First, in order to attract new investment at the lowest possible cost, we want to make sure it is possible for generators to assure the stability of their revenue. Second, in order to assure the lowest possible cost of reliable operation, we want to create incentives for all participants, including generators and consumers, to make efficient decisions in the installation and operation of their resources. In order to achieve these goals, we are proposing a combination of best practices from power markets around the world, including a two settlement short term spot market with nodal prices and co-optimisation of ancillary services, a capacity market, a clean energy portfolio standard with a market for clean energy certificates, and periodic auctions for longterm contracts that include all of the relevant products. Of course we need to make sure that these features are adapted for the specific needs of the electric industry in Mexico; for this reason the draft market rules are being discussed with generators, consumers, industry associations and other interested groups through a public consultation process.
Once the electricity reform is completely finalised, how competitive do you believe Mexico’s electricity market will be?
The wholesale power market aims to create a level playing field in which all market participants can compete on equal terms. There will be no unnecessary barriers to entry in the processes of registration, interconnection or operation, so that all interested parties can make offers to provide energy at the lowest possible cost. As a result, we believe that all aspects of the power market will be very competitive.
How will the implementation of the energy reform improve the dynamics of the market?
Prior to the recent reforms, the legal framework allowed for investment in generation under a few specific legal figures. These were quite successful; for example, the “Independent Power Producer” framework allowed CFE to sign power purchase agreements (PPAs) for the installation of more than 12,000MW, among the lowest cost generation in its fleet. Likewise, the self-supply and cogeneration schemes resulted in more than 7,000MW of installed capacity. However these legal figures were quite limited; it was not practical for generating companies to propose alternatives to the projects requested by CFE under the PPA scheme; this made it difficult for the principal customer in México, CFE, to buy from diverse renewable energy sources. On the other hand, the self-supply schemes were cumbersome, requiring the formation of a single legal person that included both the generator and consumer, and requiring a complicated open season process for the cost of transmission upgrades to be shared by CFE and private users.
The new energy market will eliminate these restrictions, making it possible for all generators to find customers in a competitive market. CFE, in its role as a “basic service supplier”, will no longer dictate where to install new generating plants; it will have to buy energy, capacity and clean energy certificates via competitive auctions, in which CFE’s own generating subsidiaries will compete with offers from the private sector. Generators will be able to freely negotiate contracts with qualified users and qualified suppliers, or simply sell their production in an efficient spot market. Likewise, the interconnection procedure will be simplified and all generators, including CFE, will be subject to the same process. Unlike before, the cost of transmission upgrades will be shared by all users whenever they provide a benefit to the system in general, no matter which generator was the first to require them. With these new rules, it will be much easier for generators to enter the market and compete.
What challenges have you encountered with the implementation of the new legal framework of the electricity sector?
The biggest challenge to implementation is the very short timeframe that the government has established. We do not have the luxury of implementing the reform slowly because it is extremely urgent to reduce electric rates and accelerate the transition to clean energies. So far we have been able to meet this challenge and complete a number of important milestones. Since the secondary laws were passed last August, we have established the new independent system operator (CENACE), published the guidelines for clean energy certificates, established the first renewable portfolio standard, and submitted to public consultation the new interconnection procedures and the rules for new electric market. These advances have only been possible as a result of a very productive cooperation between the SENER, CRE, CENACE, CFE and the private participants in the electric industry.
In Mexico’s energy market, what do you see happening in the next five years? What do you hope to accomplish?
The final goals for the electric reform are lower rates and an increased usage of clean energy. But there are a number of intermediate milestones that we will have to complete along the way. The electric power market should begin with the first auctions for long-term generation contracts in the last quarter of 2015, and the operation of a simplified spot market on January 1 2016. Clean energy certificates will begin to be traded on the market in 2018, when the first portfolio requirement becomes binding. More advanced elements will be added to the market throughout the following years, resulting in a constant improvement in efficiency. Also, it is important to highlight the restructuring of CFE; in order to guarantee open access to the transmission and distribution networks, as well as the efficient operation of the power market, the law requires CFE to be divided both vertically (Generation, Transmission, Distribution and Marketing) and horizontally (multiple companies for generation and for distribution). The definition of this separation should be completed in 2015 so that the electric power market gets off to a good start with multiple generating companies representing CFE’s different power plants.
Do you rely on global or local counsel, or some combination thereof?
The Ministry of Energy recently carried out a competitive process in order to secure outside legal counsel for support during the reform process. In the evaluation process, points were awarded both for local experience in Mexico and for experience in electric industry reforms in other countries. As a result, the winning offer combined local and international experts within its project team.
Is it necessary to hire local counsel for the kind of work you envision, or can you rely on a global firm acting as a foreign legal consultancy?
The Ministry of Energy needed legal counsel that could apply the lessons learned in other countries, but also adapt them to Mexico’s needs and legal framework. It would have been very difficult for a completely foreign firm to provide the kind of local expertise needed for this kind of support. The most successful model was a local team, complemented with international expertise from outside Mexico.
What approach does the ministry generally take in regard to legal fee structures? Do you negotiate flat fees or work with billable hours?
Whenever public budgetary resources are used to pay for a product or service, it is very important that the government be able to confirm that it received what it paid for. As a result, when hiring outside counsel, we have a preference for contracts in which the provider is paid for the deliverables it completes, as opposed to contracts based on billable hours.
Managing director of electric industry coordination
Ministry of Energy
Jeff Pavlovic is managing director of electric industry coordination in the Undersecretary of Electricity in the Mexican Ministry of Energy. He holds degrees in economics and mathematics from Duke University, a master’s degree in business administration from Stanford University and a master’s degree in economics from the Centro de Investigación y Docencia Económicas. Previously, he was managing director of generation and transmission in the Ministry of Energy and unit leader of modernisation in the Comisión Federal de Electricidad (CFE). In the United States, he was manager of generation control and dispatch for Xcel Energy and a financial analyst at LEK Consulting. Jeff has earned the NERC system operator certification and holds the Chartered Financial Analyst designation.