The energy reform and new infrastructure will lower the electric power tariffs in 2016

By Nancy J. Gonzalez

The energy reform modified the electric power sector in Mexico, says Enrique Ochoa Reza, general director of the Federal Electricity Commission (CFE). He considers the changes promoted in this reform will turn CFE into a world class and competitive company; therefore, in the nearby future the electric power tariffs may be lower.

Nowadays, the national and international private sectors are investing in new infrastructure in Mexico such as gas pipelines and renewable energies projects. These changes will favor the generation of low cost electricity for all the economic sectors.

Ochoa Reza believes this new infrastructure will positively impact CFE and the utility will gradually replace oil as the main fuel to generate electricity for natural gas or renewable energies. These are cheaper fuels; therefore, the cost of production for electricity will likely go down.

Ochoa Reza answered questions of MexicoNOW and other reporters during a press conference following his participation in the INDEX national convention recently. Following are excerpts of the press conference:

How will the energy reform benefit exporters in Mexico?

Enrique Ochoa Reza. The energy reform allows having more competitive rates with a more reliable; better quality and less environmentally damaging electrical system and grid.

The electrical system in Mexico has five main activities: Electricity generation, electric power transmission and distribution, infrastructure maintenance and creation, and commercialization. The energy reform changes some of the CFE dynamics.

For example, to transmit and distribute electric power, CFE had a computer system. Nowadays, this system is independent from CFE and will be operated by a third party to avoid conflict of interest. This computer system will first liberate for consumption the lower cost electrical power regardless of its source: Private or public sector energy producers.

The new organization the energy reform creates is very important for exporters in Mexico because now they can buy directly from any electrical power producer through bilateral contracts. These contracts must include the price and termination date of the agreement. The electrical power will be supplied by the CENACE, an independent third party, and it will use CFE infrastructure. The final cost for the user will be the result of the energy price plus the rent of the transmission and distribution infrastructure.

How competitive are the electric power rates today?

Nowadays the electric power cost is high for the domestic, business and industrial sectors. A 2012 study shows people and firms in Mexico pay more than in the U.S. in electric power bills. The study shows the industrial sector in Mexico pays 85 percent more in electric bills than a similar business in the US. while in the Mexican retail sector the cost is 135 percent higher than in the U.S. The residential sector shows the biggest gap, a 150 percent higher in Mexico than in the US.

Why is the electric power so expensive in Mexico?

At least 80 percent of the cost of energy comes from the cost of the fuel used to produce it. If we use expensive fuels, the energy will be expensive. As a result, the electric power tariffs are high in Mexico.

In Mexico, 21 percent of the production capability burns oil to generate electric power. Oil is four times more expensive than natural gas and produces 68 percent more pollution. Therefore, we want to substitute oil for natural gas to produce electricity.

Mexico´s underground has the sixth largest shale gas reserves worldwide. As a result, Mexico has the possibility to be a natural gas top producer.

In 1997, Mexico was self-sufficient to produce natural gas. In that year, Mexico only imported 3 percent of its natural gas consumption needs. Nowadays, Mexico imports 30 percent of its natural gas needs. The main suppliers of natural gas for Mexico are the U.S., Peru and the Caribbean.

Why is natural gas currently a secondary resource for CFE?

The national and international private sectors were not able to extract natural gas prior to the energy reform that was recently approved because this activity was prohibited by the Mexican Constitution. Only PEMEX could do that; therefore, the natural gas supply depended entirely on Petroleos Mexicanos. If PEMEX had not enough capability to supply natural gas, it was imported, mostly from Texas. These companies in the U.S were not able to operate in Mexico; therefore, they were in the U.S. and they created jobs and paid taxes there. The energy reform changed that non-sense.

Nowadays, national and international companies, by itself or in association with PEMEX, can extract natural gas in Mexico. As a result, more jobs will be created in Mexico; these companies will pay taxes here and will contribute to Mexico´s economic development.

Between 2012 and 2013, Mexico had several critic alerts because we had no enough natural gas the supply the demand of the industrial and electrical sectors in the country. PEMEX was not producing enough natural gas and the lack of gas pipelines was an obstacle to import more fuel. These critical alerts cost US $1billion to CFE because we had to burn oil instead of natural gas to generate electricity. This expense was paid by the CFE users in Mexico.

Does Mexico have the infrastructure to produce and transport natural gas to all regions?

The gas pipeline system in Mexico is not a real system because it is not interlinked. The gas pipeline system does not reach all the regions in Mexico; therefore, we need more infrastructure to transport natural gas. Texas has a third of Mexico´s territory, but this state has 9 times more kilometers of gas pipelines than our entire country. The U.S. has 41 times more gas pipeline kilometers than Mexico.

The National Infrastructure Program determines the different pipelines routes to increase the kilometers to transport fuels in Mexico; some of them are under construction. Once this infrastructure is finished, Mexico will have 34 percent more pipeline kilometers to transport fuel.

Some of this infrastructure is under construction. For example, the first phase of Los Ramones will be completed by the end of 2014 and this pipeline will allow transporting gas from Texas to Nuevo Leon, Tamaulipas, San Luis Potosi and Guanajuato. This gas pipeline is built by the private sector through a long term contract with PEMEX.

Other crucial gas pipelines under construction are in Chihuahua, Sonora and Sinaloa. These gas pipelines are being built by the private national and international sectors by means of longterm contract with CFE. Once they are up and running, Sonora and Sinaloa will have natural gas for the first time. The current ongoing investment in gas pipelines in Mexico is US$7.7 billion.

These new gas pipelines will be really helpful for the national electric sector. In Mexico, we have seven electric power locations burning oil to produce electricity. Once the gas pipelines are ready, CFE will invest US$200 million to turn them into natural gas based generating plants; therefore, the cost to produce electric power will be lower and more environmental friendly. 

To summarize, the first step to have a more efficient and competitive elec-tric power system, we need more gas pipelines. The second step is to turn the oil burn headquarters into natural gas electric power plants. The third and final step is to build three new electrical plants using a combined cycle with natural gas as the primary fuel and the latest technology to generate electricity. These new power plants will produce electricity at a lower cost and CFE will gradually replace oil as the main fuel.

By how much will natural gas based plants lower the cost of electric power in Mexico?

Nowadays a megawatt hour costs US$0.143, using oil as the fuel source. Once the infrastructure changes are made and the electric power plants are ready and using natural gas as the fuel source, a megawatt hour will cost US$0.056. The new combined cycle power plants will reduce the cost even more, US $0.034 per megawatt.

According to a CFE forecast, in 2017 the oil based production of electric power will be reduced up to 96 percent. The energy reform also opens the opportunity to explore renewable energies such as water, wind, solar and underground gases. CFE is willing to explore some of these alternatives to generate electricity.

The energy reform allowed CFE to become a power and gas company. Now CFE can not only sell electricity, but also fuels. In the past, if CFE had gas surplus, the only choice was to sell it to PEMEX. PEMEX bought it at a discount price and resold it to the industry at a higher price. The difference between our price and the resale price was PEMEX’s gain as a monopoly marketer of natural gas in Mexico. Nowadays, the energy reform allows several natural gas marketers; CFE is one of them.

When will the cost of electricity be more affordable in Mexico?

Our forecast to lower the cost of electricity in Mexico is two years from the energy reform approval because we need to have the new pipelines built, implement the power plants changes and construct the new electric power plants. All these changes will lower the cost and will turn CFE into a competitive company.

The energy reform opened the market; therefore, any company can sell low cost electricity in Mexico. This market will begin in 2016. CFE must be ready by that year; otherwise, the company will out of the market because burning oil is expensive. In the new system the CENACE will distribute the lowest price electric power first.

Can renewable fuels replace in the nearby future traditional fuels to generate electricity?

Not entirely, companies need to have a backup fuel source. The hydroelectricity and hydrothermal renewable sources are constant; therefore, electricity can be generated 24/7. In contrast, solar and wind power depend on weather conditions. The latter two sources need to have a backup fuel to be reliable because no company can depend on weather conditions to have electric power supply.

The backup fuel and the renewable energy infrastructure increase the cost of electricity; as a result, the Energy Regulatory Commission will give environmental certificates to the companies using clean energies. Also, these companies can get subsidies from the Government.

CFE is really interested in promoting renewable energy projects. In Chiapas CFE has an electric hydroelectric power plant open for bidding, while in Oaxaca another hydroelectric power plant is getting an upgrade. Also, in Puebla and Baja California CFE has a geothermal plant under construction.

Nowadays, CFE has a round zero (initial round) to choose the geothermal fields the company is interested in for future investment. The national and international private sectors will have rounds 1, 2, 3, and 4 in the near future to develop their own projects.

CFE is also investing US$28.5 million in wind power electric power plants in Tamaulipas to generate 900 megawatts. These projects will be completed between 2018 and 2020.

How strong are CFE finances to invest in new infrastructure and technology?

In 2013, CFE set a sales record. The company billed US$22.7 billion. In contrast, the same year CFE had its highest financial loss. The CFE deficit in 2013 was US$2.6 billion. We are working on these matters. From January thru October, 2014 sales increased by 5 percent and we reduced our losses by 38 percent. CFE is still losing money, but its losses are 38 percent lower than in the previous year.

On June 12, 2014 Mexico set another record. At 3:41 pm, four minutes before the half time break during the inaugural game of the Brazil´s World Cup, Mexico had the highest electricity consumption on its history: 40,000 megawatts. Mexico can supply 50,000 megawatts; therefore, we generate enough electricity to support our highest demand and to grow in the nearby future.

How do the technical and nontechnical losses affect CFE finances?

In Mexico, 15 percent of the electric power generated is lost during the transmission and distribution processes. This is a big problem for the company. Half of this loss is due to maintenance and technological upgrades, while the rest is a way to classify the electricity theft and the unpaid bills. In 2013, the technical and non-technical losses added up US$3.8 billion.

CFE classifies Mexico into 16 areas. The Metropolitan area concentrates three of the highest technical and non-technical zones with losses in the country. In previous years the electric power distribution in these areas was done by a different company. When these areas were under our control, the losses were 34, 29 and 25 percent of all the electric power supply. These numbers are too high. Nowadays, these losses have been reduced to 27, 24 and 19 percent respectively in each area.

Other regions, such as Golfo Norte in Monterrey have lower losses, about 11 percent. Our goal is to reduce these losses to 6 or 7 percent which is the OCDE standard.

CFE’s goal for 2018 is to reduce these losses between 10.1 and 10.9 percent; therefore, the next generation can lower these losses by 6 or 7 percent. This is the only way we will have an efficient electric power system, fewer voltage interruptions, better service and less technical and nontechnical losses. These changes will be translated into lower and competitive electric power tariffs for everyone in Mexico.