The future of electricity prices in Mexico

Mexico passed an historic energy reform in 2014. In the electric sector, the previously vertically integrated state-owned company is now open to competition from private companies in the generation and commercialization of electricity, and a new wholesale electricity market was created. The reform was passed by the PRI administration shortly after returning to power, and its stated goal is to guarantee Mexico’s energy security. The administration predicts that competition and restructuring will result in a more efficient market and lower overall electricity prices for consumer. However, the final outcome is not yet clear. Factors including plummeting oil prices, rushed restructuring of state companies and regulators, a new wholesale market with little initial private participation, and high risks in new electricity contracts create an uncertain future for the price of electricity in Mexico. This document begins with an overview of the energy reform as it relates to the electric sector, describing the restructuring of state actors and their new responsibilities, the newly created wholesale electricity market, and important features of the reform including distributed generation and clean energy certificates. It also includes the relevant legal changes for new private investment in the electric sector. It then analyzes historical trends on the price of electricity, focusing on medium and high voltage rates which do not benefit from government subsidies. It also analyzes trends in the price of natural gas, the main indicator for generation costs in Mexico. These analyses attempt to make a prediction on the medium-term price of electricity in the new wholesale market. Case studies are included for reforms in Argentina and Chile, drawing political and technological lessons to be applied to the Mexican case. The thesis concludes that the energy reform was much needed and long overdue, although the political pressure to enact it before the presidential term is over has led to an imperfect implementation. While there has been no private investment in large capacity plants, investment in renewable energy has been an unexpected success of the reform.Energy and Earth Resource