CENACE’s Evolution and Wholesale Market Auctions

CENACE was originally part of the incumbent, vertically integrated, state-run utility Comisión Federal de Electricidad (CFE). Prior to the Energy Reform, CENACE operated a virtual market for energy and capacity to efficiently allocate loads as per the former law (^{Ley del Servicio Público de Energía Eléctrica, LSPEE, 2013}) that allowed private generation for approximately 830 permits mostly for self-supply, and co-generation. So-called independent power producers or PIEs in Mexico’s definition, accounted for around 65% of the national energy in 2014, that was to be sold exclusively to CFE (^{CRE, 2017}). The Energy Reform made CENACE a decentralized public organization in August 2014 and reorganized it into an ISO with varying levels of what FERC has dubbed “minimum [ISO/RTO] functions”. CENACE’s wholesale market began operating in February 2016 with step-wise implementation of different sub-markets and products, from which short term (day ahead and then real time) energy submarkets were first implemented. These were followed by long term renewable auctions, capacity markets and then second and third rounds of renewable auctions (^{CENACE 2015}). Parts of the originally scheduled sub-market implementation have not kept up with the original timeline.

As of mid-2018, 38 private generators participate in the wholesale market. 27 of these generators are qualified suppliers and 10 generators are registered as traders without investments in generation for supply to the market (^{CENACE 2019}). CFE Básicos subsidiary, an organization created as part of the unbundling of the national utility, serves as a basic service and intermediate supplier.

Perspective from the U.S. experience is helpful for understanding the evolution of Mexico’s electricity market. The U.S. is home to seven different ISO/RTOs, with a diverse range of experience that date back to the mid-1990s. The diversity and extent of the U.S. experience in wholesale market design and regulation is very detailed and offers many layers of sub-markets and products. This makes for fertile ground for comparative analysis with Mexico. The analysis could also address other world markets such as in Europe or Australasia. However, the present approach is justified given the proximity of Mexico and US markets, as well as the data availability and its evolution for yearly evaluation and adaptation. Now, one key piece of regulation in the US, FERC Order No. 2000, asserts that the electrical system can ensure quality, reliability, continuity, security, and sustainability through market-driven activities. Mexico’s objectives for electricity market restructuring are relatively well aligned with these in that they include a) separation of monopoly parts from competitive parts by unbundling of generation, transmission, distribution, load, trade, and retail at various levels; b) promotion of competition through third-party access rules, non-discrimination of access by transmission and distribution grid subsidiaries, and increasing entry to the wholesale markets; c) ensuring that new markets with many participants will not fail in reliability, security of supply, and sufficient energy; d) seeking to align prices through market forces rather than by way of regulation, except in the case of regulated services; and e) transparency in all aspects of the new market dynamics.

CENACE has a legal obligation to a) enhance and deepen the wholesale market operations of all products traded; b) guarantee energy, physical requirements of efficiency, quality, reliability, continuity, security, and sustainability; and c) guarantee open access with no undue discrimination to the national transmission and distribution networks of all participants from the supply and demand sides of the market, in accordance with the Mexican Electricity Industry Law, or LIE (2014) and CENACE’s founding documents (^{CENACE, 2015}).

Mexico’s wholesale market began operation in February 2016. CFE load centers were the first to enter the market. CFE also participated in the first auctions for solar and wind energy in March 2016. In June 2016, the second auction attracted the first private investors in generation-24 new clean generating facilities entered the market with funds from Mexican and international investors. Per Mexico’s Secretary of Energy, SENER, clean generation is defined as electricity produced by hydroelectric, nuclear, wind, solar, highly efficient combined cycle natural gas, geothermal, and biomass facilities. According to CRE presentations in 2017, 52 new generating facilities were expected between 2018 and 2020, representing 5 gigawatts of additional capacity. 38 were operating as of mid-2018. Table 1 outlines the distribution of market participants as of 2018.

As shown in Table 1, CRE (Mexico’s national energy regulator) has granted many more permits for generators than there are market participation permits in CENACE. Among these, CRE has registered numerous solar, wind and hydroelectric projects, but no information is available on them in CENACE’s platform. The renewables projects registered with CRE mainly serve CFE load centers. Moreover, as of 2018, CENACE has 76 registered generation projects, while there are 285 wind, solar and hydroelectric permits in CRE’s official registry (^{CRE, 2018}). The fact that generation projects fail to appear in CENACE’s contracts list well after auctions took place in 2017 may imply time asymmetries in launching renewable generation for the wholesale market, or administrative problems at the wholesale market level that have delayed investment in projects.

Increasing Renewables and Potential Reliability Concerns

The significant addition of solar and wind capacity creates at once a challenge and an opportunity for CENACE. As of October 2017, 2.27% of Mexico’s effective capacity came from non-hydro renewable sources (SIE, 2017). Beginning in 2018, supply-side participants (i.e., basic and qualified users) had to acquire 5% of electrical energy through the purchase of Clean Energy Certificates (CELs). Hydroelectric, nuclear, wind, solar, combined cycle natural gas, geothermal, and biomass facilities generate these CELs and can sell them to other consumers or, in the case of prosumers, use them to cover their own CEL obligations (^{SENER, 2017}).² The required purchase of CELs will steadily climb to 35% by 2024, and non-compliance will result in per-MWh penalties (^{KPMG, 2016, p. 13}). Pollitt and Ananya (2016) posit that “very few current market arrangements are set up to support high shares of renewable electricity at politically acceptable prices and levels of security and supply” (p. 74). As a relatively new wholesale market operator, CENACE’s challenge is to shape the early development of its wholesale market products, especially as pertains to defining its ancillary services in such a way that they support renewable uptake and maximize utilization.

CENACE’s Strategic Plan

CENACE’s 2017-2021 strategic plan defines eight regional administrative branches, with one additional CENACE alternative office in the city of Puebla (^{CENACE, 2017}). Their key functions include a) operating the national electric system efficiently and reliably; b) implementing and operating the wholesale market with open access to market participants with no undue discrimination to participants; c) proposing grid expansion (transmission and distribution); and d) internally development of human capital. The López-Obrador administration scrutinized and revised the strategic plan in early 2019 but has not released details and the rationale for the revision. The administration’s website has reduced transparency in disclosing strategy or impending decisions (^{Martín Culell, 2019}), and the administration is in the process of replacing regulatory posts with new personnel as of early 2019 (^{León, 2019}). The 2017-2021 strategic plan did not mention promotion of competition and an increased market participant pool, promotion of products in the wholesale market, promotion of market signals, a code of transparency, nor attracting stake-holders. The strategic plan process does, however, outline operational strategies and tactics (^{CENACE, 2017}).

The 2017-2021 strategic plan’s lack of emphasis on promotion of wholesale market products represents a lost opportunity to increase renewable participation in ancillary service wholesale market products. For example, research from 2014 on renewables curtailment under a 50% renewable generation scenario in California found that enabling renewables to provide operating reserve ancillary services reduced curtailment of renewables and had the potential to improve overall market economics during certain times of the year (^{Nelson and Wisland, 2015}). The strategic plan’s noted interest in development of metrics and measurements provides an opportunity for shared learning around co-development of renewables and ancillary service products in the U.S. The following section reviews how FERC and U.S. ISOs developed performance assessment structures and defined metrics in the first ten years of RTO/ISO development. FERC’s “minimum functions” of an RTO/ISO (defined in 1999) are outlined below in the context of CENACE’s first and second years of operation. Following FERC’s minimum functions are 15 more granular metrics and measures of ISO/ RTO performance that have since been developed by FERC.

Contrasting Minimum Functions with Market-driven Aims in Mexico

In ^{December 1999, FERC} defined the minimum functions of an RTO in Docket No. RM99-2-000, Order No. 2000. FERC based these minimum functions on lessons learned by the regulatory agency since FERC Order No. 888 provided a basis for the first U.S. RTOs in 1996. In Table 2, FERC’s minimum functions are applied in the context of Mexico’s CENACE as a basis for evaluating the system operator’s development to date, as an exercise. These RTO/ ISO minimum functions are listed and defined in the first two columns, and examples of their strengths and weaknesses are evaluated in the following columns.

While CENACE is on track to fulfill most of the minimum functions outlined in this table in the medium term, the table shows lack of progress to date in all submarkets, including ancillary services development.

Other areas that will be especially important for CENACE to address in terms of encouraging renewables uptake include improving congestion management and parallel path flow to accommodate for the flexibility that an increasingly renewable-driven grid demands (Mohler and Sowder, 2017, p. 285). As it plans grid expansion and interregional coordination of control areas, CENACE can develop strategies to harness renewable resources in areas with high wind, solar, and/or geothermal generation potential while also considering transmission pinch points across regions that may arise due to high-renewable generation scenarios. Its capacity as a market monitor and tariff designer also positions it well to continue to open the wholesale market to new participants and provide a fair platform for their participation, reducing costs through greater competition in generation and transparency in pricing. CENACE’s continued role in serving as the sole provider of transmission services is also a key feature of ensuring nondiscriminatory access to new generators, renewable or otherwise (^{FERC, 1999, p. 330}).

An additional dimension added to this framework is the speed of moving from a centralized governance CENACE model towards a true market with minimal central intervention. Moreover, the Lopez-Obrador administration has been slow to define whether the market will aim to enhance market-driven incentives or opt to rely more on direct government intervention and government-led calls for investors to participate. An example of a more market driven approach would be for CENACE to permit participants to trade in wholesale electricity and shift towards a neutral-passive role in the market clearing processes. Speed and strategy of increased implementation of market functions is critical for success, especially as it pertains to swiftly developing approaches that support renewable uptake and utilization.

Given the rapidly changing nature of Mexico’s electricity system and CENACE’s identified need for performance assessment and metrics (^{CENACE, 2017}), the application of minimum market functions to CENACE’s first, second, and third years is a contribution toward building an updateable assessment framework. As wholesale markets continually develop, market operators and monitors can establish new minimum functions as needed, which can be combined with those outlined above. From the established minimum market functions, market operators can go into further detail to create performance metrics. The following section: a) expands on insights from the minimum functions evaluation, including FERC metrics for ISO evaluation that were developed after 10 years of the ISO/RTOs operation in the U.S., and b) highlights critical aspects of market performance that are relevant to Mexico’s current transition toward an increasingly renewable grid, and policy needs.

FERC’s ISO Performance Metrics as a Point of Reference for the Mexican Transition

Under the U.S. General Accountability Office’s recommendation in 2008, FERC began creating performance measures of U.S. RTOs/ ISOs and collecting voluntary input from non-RTO electric utilities (^{GAO, 2008}). FERC also established performance and reliability/systems operations metrics, which it reviewed and updated in 2014 and further in 2017 (FERC).

As part of the update, FERC identified 27 reliability metrics and three systems operations metrics, which are more quantitative and detailed than the original minimum functions approach from 1999. Fifteen of these metrics are especially relevant to the case of supporting renewable integration through development of ancillary services. The highlighted metrics are the crux of the present analysis and are presented in association with aforementioned minimum functions to illustrate an initial framework, which begins with a broader minimum market function and leads to establishing measurable indicators for wholesale success. At present, none of these associated FERC metrics are present in CENACE’s self-report and first planning exercise (^{CENACE, 2017}).

As can be noticed in the following Table 3, five fundamental dimensions are presented as “minimum functions” in the wholesale market: a) Ancillary services and their benefit in transitional market with scarce reserves; b) parallel path flow to guarantee network security in a new market with increasing nodes and loads; c) grid expansion projects; d) tariff administration in a disaggregated and layered market with increasing renewable capacity needs; and d) congestion management in the transitional market.

As can be observed, the fifteen critical metrics under the five “minimum functions” headers or constructs maintain a smoothly running market along the lines of the planned expansion. They also ensure the necessary ISO/ RTO’s governance over a wholesale market with numerous participants and sub-markets.

Beyond its role in direct assessment of ISO/RSO performance as outlined in Table 3, FERC oversees the North American Electric Reliability Corporation (NERC). ^NERC is a nonprofit organization that ensures the reliability of the North American bulk power system. NERC was established as part of the U.S. Energy Policy Act of 2005, passed in response to increasing electricity restructuring efforts and reliability events such as the Northeast Blackout of 2003 (^{NERC, 2014}). NERC’s key focus areas include electric bulk power system reliability, assurance, continued learning, and encouragement of a risk-based approach. Specifically, NERC develops standards for reliability, assesses long-term reliability, and identifies any threats to reliability. NERC’s purview includes the continental U.S., Canada, and the northern portion of Baja California in Mexico (^{NERC, 2017}).⁷,⁸ FERC minimum functions/metrics and CENACE’s existing branches of collaboration with NERC are helpful points of reference for CENACE as it continues to develop its wholesale market in parallel with Mexico’s increased renewable uptake.