In August 2014, a new energy law took effect in Mexico, which set in motion substantial reforms of Mexico’s electricity sector. The reforms of 2014 built off reforms from the previous energy law of 1992. Prior to the 1992 law, Mexico’s electricity sector was basically a complete monopoly by the state-owned electricity company, CFE (Comisión Federal de Electricidad, or Federal Electricity Commission). The 1992 law allowed limited private investment in the generation sector (independent power producers, or IPPs, supplied some of CFE’s electricity and some large consumers of electricity could contract directly with private generators), but CFE maintained substantial control of the sector, both vertically and horizontally. The reforms following the 2014 law restructured the electricity sector, allowing competition at both the retail and wholesale levels, unbundling CFE into independent subsidiaries by function, separating CFE horizontally with regard to its generation resources, and bringing about a “modern” wholesale electricity market. In August 2014, a new energy law took effect in Mexico, which set in motion substantial reforms of Mexico’s electricity sector. The reforms of 2014 built off reforms from the previous energy law of 1992. Prior to the 1992 law, Mexico’s electricity sector was basically a complete monopoly by the state-owned electricity company, CFE (Comisión Federal de Electricidad, or Federal Electricity Commission). The 1992 law allowed limited private investment in the generation sector (independent power producers, or IPPs, supplied some of CFE’s electricity and some large consumers of electricity could contract directly with private generators), but CFE maintained substantial control of the sector, both vertically and horizontally. The reforms following the 2014 law restructured the electricity sector, allowing competition at both the retail and wholesale levels, unbundling CFE into independent subsidiaries by function, separating CFE horizontally with regard to its generation resources, and bringing about a “modern” wholesale electricity market. 

Mexico’s Ministry of Energy (SENER) retained NERA to help with the implementation of the electricity sector reforms. NERA Associate Directors Willis Geffert and Veronica Irastorza and Director Kurt Strunk, along with Affiliated Consultants Hamish Fraser and Eugene Meehan, each led various aspects of the assignment. Ms. Irastorza served as onsite Project Manager and primary client liaison. The NERA team performed the following tasks:

• Provided feedback on the draft regulations for the new electricity market (“Bases del Mercado Eléctrico”).
• Advised on the horizontal separation of CFE’s generation division, which was separated into several generation subsidiary companies that operated with a mandate to act independently and as profit-maximizing firms. Specifically, NERA developed a model that optimized the allocation of generation units to the various subsidiaries, with the goal of minimizing market concentration to reduce the possibility of market power abuse. NERA also adjusted the allocation to take account of efficiencies of scale and concerns of equity among the CFE subsidiaries. NERA presented its recommendations to SENER.
• Helped design so-called “vesting contracts” under which the to-be-created CFE subsidiaries would sell electricity from several of their legacy generation assets. These contracts accomplished multiple goals: easing the transition to a competitive market, providing disincentives for the subsidiaries to exercise potential market power, and providing some amount of cost certainty to CFE’s retail division.
• Advised on the design of long-term auctions to procure electricity from new power plant resources (particularly renewable generation resources).
• Provided initial drafts for the detailed market rules for certain aspects of the electricity market (e.g., for the capacity market).

The wholesale electricity market went live in January 2016. The clean energy auctions have widely been viewed as successful, resulting in low prices for about 7500 MW of new renewable power resources. CFE formally split up its generation division into several competitive subsidiary companies.