Mexico capacity contracts to cover fixed costs of combined-cycle plants

Mexico’s new “capacity contracts” will guarantee that investors in combined-cycle natural gas power plants cover all their fixed costs, according to a senior official in the country’s energy ministry (Sener).

The CFE is re-evaluating tenders for the construction of new combined-cycle power plants under a new corporate structure (Image credit: Creative Commons)

Related Articles

“This product will provide important income to cover almost all the fixed costs of the power plant,” Jeff Pavlovic, general director for monitoring and coordination of Mexico's electricity industry, told the Combined Cycle Gas Turbine Plants Mexico Summit last month.

Combined-cycle plants stayed on the sidelines last week as the first long-term energy auction since the sector was opened to private investment in 2014 was completed last week. The state-owned Federal Electricity Commission (CFE) did not make any substantial offer to buy power capacity, which discouraged plants with high fixed costs from participating. Renewable power plants, which have lower fixed costs than their combined-cycle counterparts, sold 5.4 terawatt hours of energy to be supplied to residential and small commercial consumers in 15-year energy contracts beginning in 2018.

“In this electricity market there is a rule to make offers based on costs, so the price that is going to be offered for energy sometimes won't allow any margins above production costs in a perfectly competitive market,” Pavlovic said.

“This [situation] sends the correct signals for power-plant generation, but it's a problem for power plants with high fixed costs," he continued. “They need additional income; that is why we created this product: potencia.”

New opportunities

Potencia can be translated as “power-capacity availability,” according to Pavlovic. He told the conference that signatories would commit to having their power plant available for dispatch during the power grid’s critical hours, a concept similar to that of unforced capacity used by the PJM Interconnection regional transmission organization in the United States.

Mexico's next long-term energy auction, scheduled for launch in April and with final bids due in the fourth quarter of this year, will include capacity contracts. A separate mid-term auction scheduled for launch this year will also likely include capacity contracts. Before these auctions can commence, the government must finalize an assessment of how much power capacity the CFE will need to acquire.

Starting in 2017, combined-cycle power plants will also be able to sell power-capacity availability through a new short-term market.

In order to guarantee the reliability of the power grid, Mexico's Energy Regulatory Commission will require every producer of electricity to prove it has a certain amount of power capacity available. The regulator will measure a plant’s capacity annually, using the previous year’s figures as a reference point. If a power plant has less power-capacity availability than it was supposed to have, it will have the option of purchasing more from other market participants. Generators with a surplus will have the option of selling availability.

Potencia becomes a virtual concept,” Pavlovic said. “We can say or imagine it as certificates granted to power plants just for [making their capacity] available."

Pavlovic said information about power-availability requirements will soon be made available in a new regulation manual and in an updated version of a government paper on the development of the national electricity grid.

CFE auctions under revision

Meanwhile, the CFE is re-evaluating tenders for the construction of new combined-cycle power plants, and any decision will need to be approved under the new corporate structure being implemented as part of the energy-market reforms, according to Sergio Frías, subdirector for project development. The state-owned utility is being divided into at least four smaller companies under reforms aimed at guaranteeing equal opportunities for new market entrants and at improving the CFE’s productivity and profitability.

CFE has seven NGCC plants open for bidding in 2016 (Source: CFE)

“CFE is conducting a complete review of its projects to ensure we have an adequate internal rate of return,” Frías told the conference. “As a productive state-owned company, the only possibility to keep us alive is by generating profits.”

CFE had seven combined-cycle power plant projects ready for open bidding in 2016, according to Frías’ presentation to the conference. The projects have been in the company’s portfolio for up to three years, he said, and bidding processes for each will also need to be reassessed to comply with the new legislation governing Mexico’s electricity market. After those evaluations, the tenders should be approved by CFE’s new management board before the auctions are launched.

With the reforms still in their early phase, CFE is exploring models for how it may form partnerships with other companies in the future to develop projects. Frías added that the company is still interested in international development.

By Anna Flávia Rochas