Trading Jenga: Mexico’s Electric Market
New legislative reforms in 2013 and 2014 created lasting change for Mexico’s electric power, oil, and natural gas markets. This power market change impacts clean energy in Mexico. The new Power Industry Law has clean energy implications due to the new Clean Energy Certificate (CEC) award plan for annual clean energy production allocations for power suppliers and qualified customers.
The primary question jumps out: Will this market be made with profits secured by trading the underlying fuels rather than electricity itself? Long term contracting seems like the best answer in the near term to lower manufacturing risk related to prices. As Mexico increases natural resource imports, supply and commodity risk increases.
This map shows the shale formations in Texas and Mexico. Contract with a company specializing in the shale gas like Yuma Energy, Spectra, Williams, Oneok, and Kinder Morgan. Trading shale gas and using a tolling agreement to produce electric prices could be a safer option!
In the future, a Goldman Sachs style firm in Mexico may emerge which integrates these features. This could be a large foreign firm like Mercuria, Vitol, or Trafigura. It could also be one of the American firms joint venturing with a large Mexican firm for large-scale risk management resources. One of the US companies in a border state such as Energy Transfer could be the cultural best solution. Joint ventures work best when the companies have international business experience and multi-cultural people skills.
New laws in Mexico for electricity and natural resource trading allow players time to understand and implement legal changes. Currently, these markets are separate and have different clearing houses.
The Power Industry Law focuses on power generation, electric transmission and distribution, and electricity trading in Mexico. Federal Electricity Commission (Comisión Federal de Electricidad (CFE)) will function as the power market planning agent or independent system operator (ISO) as power generators build out the needed megawatts for a large industrial base.
New laws in electric trading will allow electricity commodity traders into the Mexican power market. Private power traders may engage power generators and commercial consumers using over 3 Megawatts to buy and sell electricity on the spot market and under long-term contracts with negotiated prices. This may invite the addition of new businesses into the power trading zones. Long term negotiated spot or fixed price contracts are key for industries which rely on electricity or natural gas as their primary commodity.
Generation. The Power Industry Law created a legal framework for competition in the private power generation sector and gave non-discriminatory access to power transmission and distribution developers and sellers. This helps solar and wind energy in areas of Mexico for clean energy and systems in areas unsuited for major power plants.
Transmission and Distribution. The new Power Industry Law permits the state to contract for financing, installation, maintenance, management, operation, expansion, modernization, monitoring, and maintenance of power transmission and distribution systems.
Mexico’s new legal framework created the basis of private transactions and negotiated prices for a commercial and industrial consumer using quantities larger than 3 Megawatts of electricity. The new law would apply indirectly in this instance to natural gas used to generate the 3 Megawatts. Integrated energy traders and large companies with many types of energy resources and asset classifications will benefit as this market grows.
Currency hedging decisions are key for creating an enduring business model. They require capital and strong business relationships with creditworthy entities. The clearing firms will scrutinize the underlying credit of your new LATAM business.
The FOREX markets allow for control of direct positions in a single currency and hedged transactions of one currency against another currency. Currency positions can be purchased for long-term energy swaps in Mexico and energy asset investments. This chart shows the currency swings for Mexico over a three-month period.
The over-the-counter swap energy market in LATAM is quite small. It will be exploited by the entry of a Goldman Sachs, INLT FC STONE, Mercuria, or Vitol type trading company. The ideal candidate for this area will be a company with many years of LATAM experience rather than a new market entrant.
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