The programme for the third Long Term Auction was announced by CENACE, the Mexican system and market operator, earlier this month. In this auction Load Serving Entities other than the CFE, the basic service supplier, i.e. qualified service suppliers and large scale consumers, will be able to act as potential buyers for the first time due to the implementation of the Clearing House.
The Clearing House
In the previous two auctions all generators, including private companies, could make sales offers. However, the only permitted buyer was the Federal Electricity Commission (CFE) in its role as the basic service supplier; the regulated government entity responsible for providing energy to basic users (primarily households and small businesses).
In this new auction other Load Serving Entities can present purchase offers for the first time. The two types of Load Serving Entity that will be able to participate are the Qualified Service Suppliers and the Qualified User Market Participants:
Qualified Service Suppliers – can purchase energy, capacity and CELs to supply to Qualified Users, those that consume 1 MW or more, for example industrial consumers; and
Qualified User Market Participants – users of energy that have an expected demand of more than 5MW and that consume 20GWh a year, for example factories, can bid in the auctions to purchase their own requirement of energy, capacity and CELs.
This has been made possible by the introduction of the Cámara de Compensación, or the Clearing House, for which CMS and Woodhouse Lorente Ludlow, S.C., were retained by CENACE as legal advisors. This independent entity will act as a counterparty between sellers and buyers in the Long Term Auctions, assessing the financial credibility of the market participants and socialising the risk of default.
Opening the Long Term Auctions in this way will end Qualified Service Suppliers' and Qualified User Market Participants’ dependence on private bilateral agreements to acquire energy, capacity and CELs and allow them to take advantage of the record low prices achieved in the previous two auctions.
The Mexican government has set ambitious targets for 35% of energy use to be from clean energy (including nuclear) by 2024 and 50% by 2050. More buyers in the Long Term Auctions may make these targets more readily achievable by further increasing investment in clean generation.
Potential buyers (suppliers or users) must register by 23 June and potential sellers (generators) must purchase the Tender Guidelines (the first step in the tender process) by 31 August. The results of the auction are scheduled to be announced at the end of November and the projects that are awarded contracts must commence generating by 1 January 2020.
Looking ahead CENACE is expected to launch a fourth auction towards the end of 2017 that will offer medium-term contracts, in contrast to the long-term 15-year and 20-year contracts offered in the first three auctions.
CMS and Woodhouse Lorente Ludlow, S.C., our affiliate firm in Mexico, advised on the electricity market reforms in Mexico, including the design of the Long Term Auctions. We were retained by CENACE to draft the operating guidelines for the Clearing House and the model contracts for buyers and sellers. As such we have a profound understanding of how the Mexican electricity market operates.
The Auctions explained
Through the Long Term Auctions, market participants offer to buy or sell a combination of three products; energy, capacity and Clean Energy Certificates (CELs). Successful market participants will secure contracts for the sale or purchase for one or more of these products at a fixed price for either 15 years for energy and capacity or 20 years for CELs. CENACE operates the market to provide the quantity of each sought by suppliers at the lowest possible price. This was designed to drive efficiency in the market and the certainty of returns required to encourage investment in new capacity and renewable energy. SENER’s Director of Electricity, César Hernández Ochoa, stated that the auctions are an “effective mechanism for long-term investment in clean energy and for establishing new domestic generation.”
The first two auctions
In March 2016 it was reported that 5.4 TWh was assigned in the first auction with several wind and solar firms winning 15-year contracts. In the second auction 8.9TWh of renewable generation projects won contracts. The clearing price, announced in September 2016, was $33.5/MWh, one of the lowest clean energy prices anywhere in the world and 30% lower than the average price from the first auction. International companies including Enel Green Power, EDF Energies Nouvelles, Engie and Fotowatio won contracts. We reported on the results of the first auction here and of the second auction here.