Fitch: US shale gas access may lower Mexican electricity burden

Electric substation
Source: DollarPhotoClub

Access to the US shale gas market may lower the burden of Mexico’s historically high prices of electricity, according to Fitch Ratings. Recent regulatory changes are likely to guarantee the success of the wholesale electricity market.

Electricity prices in Mexico have been high compared with international prices. US industrial electricity prices are about 70% higher, mostly due to Mexico’s reliance on oil-based production. Lower oil prices have contributed to reducing this gap, increasing manufacturing output, although not on a sustained basis.

Fitch believes access to US shale gas would reduce fuel costs, contributing to more competitive prices that would encourage international industrial investors to bring operations to Mexico. The price of fuel determines about 80% of the cost of electricity in Mexico. Some of the potential savings in power generation can be attributed to the country’s ability to tap into the abundant gas resources coming from US shale fields.

Comision Federal de Electricidad has plans for a large expansion of the national network of gas pipelines by converting seven plants by the end of 2016 and building nine new combined cycle power plants. Mexico plans to invest USD146 billion in the electric system by 2029. An investment of USD33 billion will strengthen the T&D networks, reducing losses, increasing connectivity and helping fuel supplies reach power generation sites. An additional USD113 billion investment in generation will help create an energy matrix based in natural gas and renewables, adding 60 gigawatts of additional installed capacity, with more than 40% related to gas.

Fitch believes that reducing electricity costs for industrials, which represent approximately 57% of the country’s total consumption, is important to help make the country more competitive in global markets. Decreasing that will increase Mexico’s competitiveness in domestic and international markets.

Recent regulatory framework outlines for Mexico’s electricity sector include the Energy Transition Law, as well as clean energy goals. The law’s purpose is to regulate the sustainable use of energy, the obligations of power companies regarding clean energy and the reduction of the electric power industry’s polluting emissions, ensuring the competitiveness of the productive sectors. The clean energy goals serve as minimum percentage targets relating to the total generation and consumption of clean energy electricity in Mexico.

Mexico generates around 12% of its power from renewable sources. One of the main vehicles for enforcing its clean energy goals is the Clean Energy Certificates (CEL). The Secretaria de Energia will establish CEL requirements, which will be covered by producing a certain amount of clean energy, buying the energy from clean energy producers or buying CELs.

According to the regulations, each CEL will represent 1 MWh produced from a clean energy source. The CEL requirements will not be enforced until 2018, giving entities time to adapt to the new rules. The CRE will verify compliance with the clean energy goals and establish the corresponding administrative regulations.

The CEL process is new to Mexico. Electricity producers and large consumers of electricity that rely heavily on fossil fuels will purchase the certificates from the government, which, in turn will invest those funds either in developing clean energy projects in regions where it is not available or in expanding existing projects. Issuance of CELs will serve as a green incentive and a regulatory mechanism to meet the country’s clean energy goals.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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