Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.
August 28 marks the sixth anniversary of Cenagas, which is in charge of managing the capacity and balance of the nation’s gas pipeline system, and of Cenace, dedicated to managing the power system and the operation of the wholesale power market. They were created as a way to break down vertical integration in the gas and electricity industry. The aspiration was a new industrial organization in which state oil firm Petróleos Mexicanos (Pemex) and state utility Comisión Federal de Electricidad (CFE) would cease to be the only suppliers of energy.
Through effective open access Cenagas and Cenace would be responsible for guaranteeing open and non-unduly discriminatory access to the respective networks. Both are also responsible for proposing plans to expand the networks and thus meet the needs of the market and not just the interests of state monopolies.
The simultaneous birth of both independent entities was a recognition of the almost symbiotic relationship between electricity generation and gas transportation. As an example of this, by decree, the director of Cenagas is a permanent guest at sessions of the Cenace board of directors. The affinity was meant to force greater coordination in the layout and configuration of the energy networks and continuous and smooth operation. The industrial organization that was sought with broad private participation implied that the independence and objectivity of the institutions were unquestionable.
Between their creation in August 2014, and December 2018, when the previous government ended, much was done to achieve credibility at both. Cenagas ran its first open season and implemented a capacity reserve regime. Cenace advanced in the creation of a day ahead and real time market with related services such as a clearinghouse that allowed for three long term auctions in the wholesale market. A fourth was planned. Confidence in the impartiality of both entities was being achieved little by little.
But from December 2018 on, the distrust of the new authorities in everything that the previous governments had done meant a suspension of this fourth auction. Similar actions were stalled at Cenagas. The López Obrador government simply does not coincide with the vision of the electricity and gas industries as envisaged in the landmark energy reform of 2014. The new public policy in the energy sector has nationalist objectives. Cenace was prevented from continuing with the implementation of the Clean Energy Certificates market on instructions from the Energy Ministry, and restarting long-term auctions does not seem to be on the public agenda. The planning schemes of Cenagas and Cenace are being ignored. Neither PRODESEN, the National Electricity System Development Program, nor the Five-Year Expansion Plan of the Integrated System have been published according to the times provided by law. The capacity allocation mechanisms in a gas network that has changed its flow configuration dramatically in the last year is still pending despite repeated announcements that they will resume.
A central theme in the speeches of the current government is the “recovery” of state leadership in the energy sector. But in the institutional design resulting from the reform, Cenace and Cenagas are just the operating agencies in charge of taking care of the public interest in the daily operation of the electricity and gas sector. They were given the mandate to take all actions to achieve the continuity and reliability of gas and power service. It is these control centers that should be strengthened so that they can take charge of looking out for the national interest, understood as the welfare of consumers, the certainty of investments, and the quality of services for economic growth.
However, the government has so far undermined the principles of open access, efficiency, transparency and objectivity to give rise to the idea that energy sovereignty can be achieved with the strengthening of public monopolies. The verbal attacks on private investment have not been few. In the power sector, there have been changes in the rules of the game, particularly in the changing of methodologies for calculating transmission rates, which significantly affects past investment decisions in generation projects for self-supply. In the gas sector the continuous questioning of transport capacity contracts is a sword of Damocles that will hardly encourage private companies to build new gas pipelines.
Cenace and Cenagas now face questions about their independence, and there does not seem to be concern from anyone in government about the implications of this in the short and long term. Today’s private participants intend to resist as long as possible, and the fundamental variables that should trigger investments are still present. The energy imbalance is real. This does not change with political speeches. There are huge gaps in energy infrastructure that need to be met. An easy example of this is in the two peninsulas of Mexico.
In the case of the Yucatán, deficiencies in the supply of natural gas from the Nuevo Pemex gathering plant to the Mayakán gas pipeline have constantly caused energy strains. The continuity of supply has required the use of the available generation installed in Campeche and Yucatán, which is based on diesel and therefore of low efficiency. This situation has triggered dozens of operational alerts. Clearly, a substantive solution implies deep coordination between Cenace and Cenagas in planning and in the clear implementation of processes for assigning natural gas transportation capacity in different pipeline systems along with planned transmission investments so that all potential investors have a good idea of long-term nodal prices in the area. Rolling-in coordinated open seasons and rate designs should be the subject of discussion in regional public consultations. None of this is occurring. The solution has been to resort to CFE as promoter and anchor of the Cuxtal project. Industrial users and independent generation projects will have no other way than to knock on the door of CFE’s trading arm to get the gas they so badly need.
On the other end of Mexico, the case of Baja California is even more dramatic. In this peninsula that extends from north to south for more than a thousand kilometers, there are three electricity grids completely isolated from the rest of the country. The most important for its economic and population size is connected with the CAISO of California. The import of electricity is fundamental to meeting energy needs. Regarding natural gas, Pemex has never been the incumbent in the area and Cenagas has no presence of any kind. Infraestructura Energética Nova (IEnova), the subsidiary of Sempra Energy, owns and operates the gas infrastructure that includes gas pipelines, a distribution zone and a liquefied natural gas regasification terminal. CFE has historically had a lot to do in the development of this gas network and generation plants. However, in summer, peak demand saturates the Rosarito pipeline and the North Baja system upstream. There is simply no space to meet new firm gas consumption in the summer.
This summer, with the fires in California and the heat wave, international exchanges have been in a vulnerable situation. The space available to avoid collapse lies in the demand response and in a call for an emergency plan in which Cenace dispatches generation based on natural gas 24 hours a day. In an attempt to alleviate the situation, even local authorities have called for a tender for a solar park to meet the needs of the state’s public services. The construction of a transmission line that would connect Baja California with the rest of the country has been included in Cenace planning for years.
The solution of the current government will come from CFE, not from the operator. The tender for the park will be suspended because it is redundant and a new solar project is planned by CFE. And although CFE Transmission is the natural monopoly in charge and has universal service provision obligations, the company has ignored the execution of the interconnection project and has suggested that the Baja California state government take responsibility for this. As for freeing up new transmission capacity in existing pipelines, no one in the gas sector seems to want to coordinate a proposal. Baja California is not Pemex territory and that explains the indifference.
Six years after the creation of these two operators, the promise of building a robust and sophisticated market for regional well-being and fostering energy security in Mexico and North America remains unmet. The institutional design has been blurred and a new energy policy focused on the needs of the people is more rhetorical than concrete. The good news is that these two institutions are still here and their future importance cannot be overstated.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 2577-9966 | ISSN © 1532-1266 |