Changes in the Generation Dispatch Criterion in Mexico

CHANGES IN THE GENERATION DISPATCH CRITERION IN MEXICO: A SUMMARY OF DIRECT IMPACTS

Amendments to Mexico’s Electric Industry Law, signed into law on March 9, 2021, have generated a series of debates and, perhaps most importantly, resulted in proceedings in Mexico’s Judiciary surrounding the constitutionality of the legislation. Legal challenges have been set forth by both industry and legislators of the opposition. Beyond the key question and debate of the law’s constitutionality, the legislation will have significant effects on the economy and the environment that bear noting. For starters, the amendments change the generation dispatch criteria which stands out for its short run impacts on the cost of supply for regulated users and the increase in Green House Gas (GHG) emissions. This Policy Brief will detail the impacts of the power sector legislation based upon the results of an analysis carried out for Mexico’s Business Coordinating Council (CCE by its acronym in Spanish). The change in the generation dispatch is the result of the introduction of contracts with physical delivery commitments, instead of financial contracts, as the mechanism to provide energy to CFE Basic Supply. Previously established market rules and regulations clearly afford CFE Basic Supply the role as the only regulated load serving entity (LSE) operating in the market. The clear impact is a departure from the criteria of using minimum variable cost to construct the supply curve in the market. Indeed, such a substitution, along with a provision that states that electricity, power and related services should be offered to the wholesale market based on unit production costs, but guaranteeing physical contracts in the first instance only need be viewed for the discriminatory elements at their core. Considering that physical contracts can only be signed with plants owned by CFE Gencos this implies that these will displace and discriminate against what are more efficient privately operated power plants in the generation dispatch. Under the minimum cost dispatch, available generation plants are sorted from lowest to highest variable costs for each hour of the day at each node. The last generator to meet the total demand at the corresponding hour and node sets the locational marginal price (LMP). Figure 1 illustrates the change and its results.

INSTITUE OF THE AMERICAS | POLICY BRIEFING

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