Opinion: Mexico electricity market overhaul and impact on geothermal

President Andrés Manuel López Obrador visiting the Los Azufres III Phase 2 (unit 18) plant, Dec. 2019 (source: CFE)

Earlier this month, we published an article that has received some pointed replies. In the article “Electricity Market overhaul will kill geothermal projects in Mexico” I essentially said that the recent “electricity market overhaul passed by the Mexican Senate, essentially ends private and foreign investment into geothermal and renewable energy development”

In a reply, Luis C.A. Gutiérrez-Negrín, a former colleague of mine on the Board of Directors at IGA, gave us his opinion and take on the points made, which we want to publish here.

The opinion of the article “Electricity Market overhaul will kill geothermal projects in Mexico” is based on a note published by La Prensa Latina on March 3^rd, but you also cited as a precedent a previous note published in the same newsletter on July 20, 2020, informing about the cancellation of four international bids for the construction of one geothermal power plant in Los Humeros (25MW), two combined cycle power plants (1600MW), and another small internal combustion plant. But in fact, the cancellation of the tenders of all of those plants was due to the reduction of the electric demand resulting from the Covid 19 pandemic, and has no relation with the current reform of the electric law (LIE: Ley de la Industria Eléctrica).

Regarding that reform, passed by the Mexican Congress on March 4^th, it’s convenient start by clarifying that it affects nothing to the geothermal industry, the current plants in operation or the future plants, be these of private or public ownership. And that is because, as you know, all geothermal power plants are baseload, due to their reliability, predictability and independence of weather changes. So, the legislation reform does not “end private and foreign investment into geothermal (…) development”, as the head of your op ed states.

Having said that, let me now clarify how the reform relates with other renewables sources, i.e., solar (PV) and wind. To do that, it’s convenient to know that the reform only changes some paragraphs (called fractions) of nine articles out of the 169 articles of the current LIE that remain unchanged. All of those changes are to introduce a new kind of PPA contract for electric coverage, called Electric Coverage Contract with Delivery Compromise. The current electric coverage PPA contracts, granted as result of the three international public auctions in 2017 and 2018 and signed by CFE and several solar and wind private developers, only establish a price of the kWh (in US$) and the gross amount of electricity to be delivered and paid along each year during the time set in the contract (usually 20 years).

All of these already signed contracts remain in effect, with no change. But, for future contracts, the reform establishes that they must include a program of deliveries of the energy (or the power, or the ancillary services) detailed along the year, according to the dispatch rules. The objective of this change for future contracts is to assure the quality, reliability and continuity of the electric system in Mexico, threatened in some of its nodes by the high penetration of intermittent sources (i.e., solar and wind) and lacking of the enough backup. Is it going to affect the future development of private solar and wind plants? Probably yes, if they look for contracts similar to the current ones. But probably not, if they can offer an appropriate mix of intermittent generation combined with backup. For instance, solar plants supported by geothermal. So, the legal reform neither “ends private and foreign investment into (…) renewable energy development”, but only modifies the legal framework.

The legal reform includes two transitory articles that dispose the review of two type of permits and contracts currently in operation in the Mexican electric market. One is the self-supplier permit that subsists since the previous electric law, to be sure that all those permits correspond actually for self-supply, because many are really PPA contracts between a generator and several clients. The other is the Independent Power Producers (IPP), also subsisting from the previous law, to be sure that all of those contracts, signed between IPPs and CFE, are not violating certain legal aspects. Wrong self-supplying permits and IPP contracts must be cancelled or re-negotiated, and of course that is going to affect some private companies, which are going to challenge the legality of the reform.

Luis C.A. Gutiérrez-Negrín