Analysis of an Electricity Market Restructuring Reform: The Case of Mexico

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In 2013, Mexico started reforming its electricity sector, expecting improvements in the performance of the industry and increases in consumers’ welfare. The 2012-2018 administration introduced competition to their generation segment and created a Wholesale Electricity Market through a series of constitutional amendments. It aimed to attract private capital to modernize the sector and improve the quality and reliability of energy supply in the country. It also sought to decrease the high electric costs and encourage the incorporation of clean energy in the sector. However, consumer prices have not reflected the improvements in competition in the market. This framework has allowed the current government to propose measures that are opposed to the competitive model. The purpose of this project is to analyze the implemented policies and their consequences, as well as the implications of keep increasing market competitions or returning to a state-owned utility monopoly. Paul Joskow developed some key principles for reforming processes to create efficient electricity markets. These principles can be used as a “standard model” for jurisdictions restructuring their power sector. The model can be helpful to analyze any country’s restructuring electricity reforms. This project compares them to Mexico’s measures to identify barriers to competition and other sources of inefficiencies in the Mexican electricity market. According to the literature review, the model based on Joskow’s principles for a successful liberalizing reform mainly consists of: i) Privatization of state-owned utilities, ii) Vertical separation of competitive segments, iii) Designation of a single Independent System Operator (ISO), iv) Promotion of efficient access to the transmission network, v) Creation of voluntary public wholesale spot energy and operating reserve market institutions, vi) Development of active demand-side institutions and vii) Creation of independent regulatory agencies. For a reform to be successful, it also needs a strong political commitment to it. Furthermore, nonstable market rules and regulatory imperfections deter potential investments in new generating capacity. Mexico complied with the vertical and horizontal separation of the state utility, the designation of an ISO, the creation of the institutions for a wholesale market and the creation of independent regulatory agencies. Nevertheless, the Mexican restructuring process did not privatize its state-owned utility. That decision makes it harder to incentivize performance improvements and the utility can be used to pursue political agendas. Also, Mexico is still in an early stage in the development of demand-side management institutions, limiting the efficiency of the market to incorporate demand responses. Moreover, prices have not decreased due to the increasing congestion in various links of the national transmission network. Additionally, with the change in administration, there is currently weak political support for the reform and the market rules are unstable, discouraging investment. The legal separation of CFE was pulled back and two temporarily suspended agreements may allow for exclusionary behaviour in the access to transmission. These actions impose further barriers to competition.
Flores, B. (2020). Analysis of an Electricity Market Restructuring Reform: The Case of Mexico (Unpublished master's project). University of Calgary, Calgary, AB.