Mexico capacity and power auctions supported by clean energy certificates
The constitutional reform approved at the end of 2013 and the associated secondary legislations adopted in August 2014 and 2015 provide for a fundamental transformation of Mexico’s energy sector. On the basis of those legislative changes Mexico created a wholesale power market with a system of capacity and power auctions in which renewable energy technologies can take part and are additionally supported by Clean Energy Certificates (CLEs).
Legislation adopted in August 2014 allows for a competition of private companies in the electricity generation sector. Private investors will be able to buy, sell and build new generation units. Also, private generators, including renewable energy plants, will be able to sell electricity on the spot market, directly to high-volume consumers and to the governmental designated body responsible for transmission and distribution lines. Mexico’s wholesale market was non-existent before the reform and it began test operations starting from September 2015. Simplified but actual operation of the market started in 2016 with full operation planned for 2018.
System of medium and long-term auctions will be main mechanisms to procure energy capacity and power including renewables. Auctions will be held at least once a year.
Medium-term auctions will provide contracts for 3-years periods. Electricity will be delivered from 1st of January following the year when capacity was contracted.
Long-term auctions will provide power purchase contracts for 15-years period, an improvement from the first draft of the regulation where 10-year period was proposed. Longer remuneration period creates more favourable financial environment for renewable investors since it secures their long-term ficing. Long-term auction are split for capacity auction, energy auction and Clean Energy Certificates (CELs).
Capacity auctions are open for all projects offering firm capacity both conventional and clean energy technologies. Projects sign contract to have a given amount of capacity available at a determined zone and dispatch electricity to the spot market when required. Projects must be located within the system that they are bidding into.
Energy auctions are open only for clean energy technologies. “Clean energy technologies” are understood in the Mexican law as: nuclear, hydropower, bioenergy, geothermal, efficient cogeneration, wind and solar installations. Projects must dispatch power to the ode within their generation zone in the national system. Nodes are set by the National Center for Energy Control (CENACE). The most price competitive offer win the bid. There are two different price calculation methods within the energy auction split according to the energy technology defined as baseload clean energy and intermittent clean energy.
Baseload clean energy is defined as nuclear, hydropower, biomass, geothermal and efficient cogeneration. Price finding mechanism is straightforward for this type of technologies using simple method of price bidding per MWh.
Intermittent clean energy captures wind and solar installations. For this technologies Mexico created an interesting price calculation method that rewards projects for producing electricity when their generation is needed the most and obliges generators to pay to the system for producing when the electricity supply exceeds the demand. The system is based on the set of price reference benchmarks. The benchmarks are set taking into account daily, seasonal, yearly and location specific differences in an electricity market value. The benchmarks are set ahead for 15 years and do not change once contracted. The benchmarks can be adjusted down or up in the future energy auctions. The benchmarks are calculated on the basis of expected and the average marginal price in the generation zone. CENACE is an institution responsible for calculation and announcement of the price benchmarks.
Wind and solar projects place one bid per contract (price in the USD or Mexican Pesos per MWh of electricity produced for the duration of plant’s lifetime). Winning bids sign 15-years contracts and start generating. When the established benchmark exceeds the expected average marginal price of the electricity, the intermittent producer receives value of the bid (written in the contract) plus the benchmark value. In a case when the benchmarks is lower than the expected average marginal price of the electricity the intermittent producer received value of the bid minus the benchmark. Therefore the revenues of the generator differ per hour, day, month and a year. Given this system of price calculation, it is very important for the bidders to carefully choose the node that they bid into since the benchmark is calculated per each node.
The Clean Energy Certificates (CELs) are awarded only to the clean energy generators. The government determines the requirements for CELson a yearly basis three years in advance of the compliance period. The first compliance period will be in 2018 with quota set at 5% level. All clean energy generators, defined as power plants using clean energies, developed after August 2014 will receive 1 CEL/MWh generated. Certificates will be issues to the generators for period of 20 years. Clean energy certificates are bankable and do not expire. Penalty for non-compliance is between USD 30-250/MWh. The certificates can be purchased and sold, under monitoring of the regulatory commission of energy. Up to 6 million of the certificates will be awarded in the first auction via 20-year contracts that seek to produce up to 2,500 MW of additional power generation from clean energy sources.
The first long-term auction were be held in 2016: In November 2015 Mexico announced the call for proposals for Mexico’s first large-scale power auction. In January, CENACE published capacity and energy demand to be met via the auctions. Capacity auction was opened for 500 MW of installations. Energy auction was opened for total of 6.46 TWh/year auctioned with a ceiling price of USD 49/MWh. 103 bidders expressed interest by applying for pre-qualification which testifies to the strong interest of the industry. Certificate auction was opened for 6 million of CLEs with a ceiling price of USD 26/CLE. Winning projects were announced at the end of March 2016.
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