Much like Texas, Mexico has had a long history with energy reform — their reforms started in 1992.  These reforms allowed the operation and ownership of privately owned electricity generation.

Within 10 years, 21% of the installed capacity was provided by Independent Power Producers (IPPs). At the time, these reforms did not prevent the price of electricity from rising. The reason for this is because state owned utilities like Federal Electricity Commission remained the only official provider of electricity.  It had the power to buy all of the IPPs generated electricity, keeping them confined to rigid, long-term contracts.

In 2013, new reforms got rid of the monopolization of the energy sector by the state when transmission and distribution systems were given access to private power generators. To help run the wholesale market, the new reforms also implemented an independent operator. This paved the way for large energy customers to contract generators of electricity directly. However, the Federal Electricity Commission continued to own 50% of all electricity generation, not to mention the rights to all distribution and transmission within Mexico.

Two years ago, the Mexican government passed a law that required the deregulation of the energy industry, a process that officially started at the beginning of this year. The reform forces the electricity market within the country to open up energy generation and distribution to competition. This will allow more developers to enter the market who can sell electricity to Electric Service Providers (ESPs) in addition to the Federal Electricity Commission.

In Mexico, the energy deregulation changes (and more) will ultimately allow private investment in areas including, refining, transport, exploration, extraction, storage and distribution and help to better commercialize electricity.

Impact of Energy Reform in Mexico

Mexico’s energy reform is important for the industry within the country and around the world. Why? Well, for the first time since 1938, the oil and gas market within Mexico is open to private investment or private investors – both local and foreign.

The recent implementation of energy deregulation will also have a huge impact on Mexico’s commercial, institutional and industrial customers, specifically the ones that consume large quantities of electricity. This is due to the fact that reform provides greater ability for these types of organizations to create Power Purchase Agreements (PPAs) with IIPs to source electricity. At the moment, this is particularity true for bilateral renewable PPAs, since the wholesale energy market still requires further definition. Therefore, the best PPAs lie with self-supply, renewable energy projects – which are only available to commercial, institutional and industrial customers through to the end of the year.

What Are Power Purchase Agreements (PPAs)?

Power Purchase Agreements (PPAs), or Electricity Power Agreements are contracts between two parties:

Party One – The group looking to purchase electricity. They also tend to be a utility that buys electricity to sell to customers. Alternatively, the buyer might be a school, building occupant, business, or government entity.

Party Two – The group looking to sell electricity. They are also responsible for the agreed project and are often an Independent Power Producer (IPP).

The agreement or contract outlines all of the commercial terms for the acceptance of the sale. Terms include, project start date, schedule for delivery of electricity, penalties, fees, and payment and termination terms. While there are various different formats for a PPA, they are all subject to regulation from the Federal Energy Regulatory Commission (FERC). FERC is responsible for figuring out which organizations are qualified and applicable for PPAs based on the Energy Policy Act.

Mexico’s Energy Reform – The Benefits

There are several benefits to the new energy reform in Mexico. As mentioned above, these benefits will currently have the greatest impact the commercial, institutional and industrial customers. Overall, the most significant impact will be the heavy reductions in the cost of electricity for many organizations through renewable focused PPAs.

• Renewable facilities produce electricity and deliver it to the grid for real-time use. The Federal Electricity Commission fixes the price and applies that price to the customer when they use the electricity – any time of day.
• These renewable projects can be located anywhere in Mexico, allowing companies to decide where to deliver the contracted electricity.
• In 2018, customers will be required to source 5% of electricity from renewable energy. If these companies start today, they will avoid these costs in the future.

The new reform also allows Mexico to import gas from anywhere in the world. BBVA reported a forecast of 2.2% growth this year alone, with a 2.7% growth for the following year. Attracting private investment through these new reforms will help to improve the economic situation regarding energy, causing the price of gas to reach 12.5 pesos per liter. This free competition would have customers seeing a reduction in cost of up to 5%.

Business Opportunities in Mexico

The new energy reforms in Mexico will help to change and improve business practices within the energy industry not only within the country, but also on a global and international scale.

Integrated oil companies have the opportunity to grow their level of production in an area of the world that has minimal geopolitical risk, and the right combination of reserves needed for shale, deepwater or conventional oil and gas investments. These types of investments appeal to Mexico for the reason that they encourage stability as well as introduce big oil and gas brands to their economy.

Mexico’s energy reform also offers national oil companies several business opportunities within the energy market. Brazil has recently become a deregulated country, demonstrating the possibilities for a successful transformation within the industry as an important producer of deepwater oil and gas. These types of investments are longer term, which are appealing to governments because they come with lower margins.

In countries like the United States, independent oil companies lead the charge, so to speak, within the oil and gas industry. These companies have the experience and tools required for successful operations, making them the frontrunners for developing partnerships with Mexican oil companies.

Within Mexico itself, established oil and gas companies will likely see a change in processes and operations as new contracts and partnerships are formed. Developed partnerships with international companies will also help Mexican companies focus on health and safety processes and procedures within their facilities.

All of these elements would have a positive impact on the global industry markets. Oil production in Mexico alone is expected to grow 40%, producing up to 3.5 million bbl/d by 2025.

This change or shift would make Mexico the 5th largest producer of oil in the world.