The Mexico energy reform began in 2013 with the goals of creating an open, transparent and competitive market to reduce electricity prices, increase reliability, and meet clean energy goals. To meet these goals, the state-ran generation owner, CFE, was split into six companies to ensure fair competition; an independent system operator, CENACE, was formed; and auctions for reliability and clean energy have been conducted. As a part of the broader reform, the Energy Transition Law established the requirement for long-term planning (Program of Development of the National Electric System or PRODESEN) and directly mandated clean energy goals. The latest PRODESEN was published in June 2017 and contains even more evidence towards the rapid evolution of the Mexican Energy Market.
The strong demand growth forecasted in Mexico over the next 15 years has decreased with each of the last three PRODESENs. In the latest PRODESEN (2017) the demand growth averages 2.9%, down from 3.4% in the 2016 PRODESEN and 3.6% in the 2015 PRODESEN. Historically, on average from 2005 to 2015, the demand growth has been 2.8%. Despite the reduction in forecasted demand growth, Mexico represents significant demand growth compared to other markets.
Figure 1. Historical and forecasted annual demand growth rates in each PRODESEN. Source
Historical generation is dominated by natural gas and oil which accounts for nearly 68% of all generation, and will remain a significant source of generation in the future. Based on a recent Mexico Energy Outlook by the International Energy Agency (IEA), Mexico has plenty of domestic fuel production capability but the competitive gas prices in the U.S. has led to rapid growth in gas imports from the U.S. (26% average annual increase in recent years) and account for 40% of demand. Future import growth estimates are supported by numerous pipeline projects between the U.S. and Mexico outlined in the PRODESEN. This increasing linkage between U.S. and Mexico markets suggests Henry Hub will be a good predictor in Mexico natural gas prices. With that said, Mexico is taking steps to attempt to boost domestic production and compete with imports by removing price caps on domestic supply. Forecasting these prices given market changes, such as removing price caps, will be a major challenge and have a significant impact on electric market forecasting.
Figure 2. Historical generation by fuel type from 2014 to 2016. Source
Large changes in fifteen-year forecasted capacity expansions have also occurred since the 2015 PRODESEN. The forecasted amount of combined cycle additions has decreased substantially, while wind and solar have increased. Particularly, solar capacity has dramatically increased most likely driven by record low solar prices. Expectations for hydro power have also fallen in each subsequent planning scenario as recent hydro forecasts have softened.
Figure 3. Total projected capacity additions over the fifteen-year PRODESEN forecast. Source
The Mexican energy market has made tremendous strides in a very short time frame from the enactment of laws in 2013 to long-term auctions spurring substantial investment in clean energy. It will be important to capture the changing natural gas market and renewable energy growth for power market forecasting. This can be accomplished through a combination of scenarios and stochastic simulations using a well vetted simulation tool and database. If you would like to schedule a demonstration of our Mexico database please contact sales@epis.com.