Changes in the Generation Dispatch Criterion in Mexico

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

To be fair, at this stage the degree to which more efficient plants will be replaced by less efficient ones is not perfectly clear. But what is clear is the desired dispatch order set forth by President Lopez Obrador’s effort: 1. CFE hydro plants; 2. other CFE plants; 3. Wind and solar private plants and 4. Natural Gas Combined Cycle (NGCC) privately operated plants. Nevertheless, this specific criterion was not part of the legislative package and thus legal reform itself. On the other hand, applying this construct literally would imply paying double for energy that is already contracted with private generators under a take or pay scheme (such as from renewable auctions, for instance). Given the slight variation of the exact legislation and overarching rhetoric from the Lopez Obrador administration, our analysis simulated two scenarios to estimate the implications of changing the dispatch order. A “high” scenario assumed a greater reliance on CFE plants based on fuel oil, although maintaining the dispatch of energy from auctions. The “low” scenario assumed a greater participation of NGCC from Independent Power Producers (IPPs) but with fuel oil consumption remaining still higher than in the absence of the reform. An extreme scenario in which absolutely all CFE plants are dispatched before the renewable plants from IPPs or renewable auctions was discarded due to its very high costs and unlikely eventuality. Figure 3 illustrates what happens because of the change in the dispatch order in any of the two scenarios. CFE inefficient plants with physical contracts to supply the basic service demand are “forced” to generate displacing more efficient plants that would have been dispatched otherwise (under the minimum cost criterion). As a result, the last plant to satisfy the total demand –which includes non-basic service users–is one with a lower variable cost that the one that would have been dispatched under normal conditions. This change has several implications. In the first place, there is a cost overrun due to “forced” generation by inefficient CFE plants. Physical contracts imply that these users will have to pay a higher price than the LMP in the market. At the same time, however, the new LMP is lower than it would have been under the normal dispatch. This in turn means a lower marginal rent for all efficient generators being dispatched but a benefit for qualified service users.

INSTITUE OF THE AMERICAS | POLICY BRIEFING

3

Made with FlippingBook Ebook Creator