Why Industrial Firms Are Leaving Mexico's Utility Tariff
Since Mexico de-regulated its energy markets—transitioning from what was essentially a government-backed monopoly to a competitive marketplace where businesses have options for their energy suppliers—industrial firms have begun capitalizing on the opportunity to leave the country’s utility tariff, otherwise referred to as CFE.
Fully understanding why these businesses are leaving the utility tariff requires putting Mexico's current energy market in the right context. Here we’ll explain why industrials operating in Mexico had so much difficulty managing energy costs prior to de-regulation, how the decision to de-regulate can impact energy prices, and what percentage of commercial and industrial (C&I) businesses tend to take advantage of these kinds of opportunities to shop for independent supply contracts.
1. Challenges Industrials Faced Prior to Mexico's Energy Market Reform
Prior to January 2016, when Mexico’s market reforms were put into place, it was nearly impossible for businesses to create predictable energy budgets. The Comisión Federal de Electricidad (CFE)—the monopoly responsible for all generation, transmission, distribution, and contracting—did not offer long-term, fixed-price contracts, and power prices swung wildly from month to month.
On top of dramatic monthly tariff changes, industrial customers on the CFE tariff effectively subsidized rates for the CFE’s residential customers. In the Baja California region, for example, industrial customers faced rates that were 225% higher than those for residential customers under the CFE tariff.
Lastly, the prices that industrial firms paid for power were non-competitive. Because the CFE was a vertically integrated monopoly, they faced no pricing pressure. Industrial firms could negotiate directly with the utility, but they fundamentally lacked leverage. Steeply inclining demand and time-of-use rates were punitive to industrial customers with high load factors.
2. How Deregulation Can Impact Energy Prices
It’s safe to assume that Mexico’s energy reform will reduce costs for both power and natural gas in the region. Enel X’s energy advisors have already found million-dollar savings opportunities for clients leaving the CFE, but the law of small numbers is clearly at play here.
More broadly, we might consider the impact that deregulation has had on energy prices in Ohio. While not a 1:1 match, Ohio’s market reform is a telling example of how energy prices tend to react when competitive supply options are introduced.
In a 2016 study on the impact of deregulation in Ohio, Cleveland State University analyzed price trends in three regulated Midwestern states (Indiana, Michigan, Wisconsin) against three deregulated Midwestern states (Illinois, Ohio, and Pennsylvania). The study found that electricity prices in regulated markets climbed 11% from 2000 to 2014 but dropped 8.5% in deregulated markets during the same timeframe.
The same independent study found that Ohio’s deregulated electricity market has saved the state’s ratepayers approximately $15 billion since 2011.
Only time will reveal the macroeconomic impacts of Mexico’s energy reform, but reforms across the US have generated significant savings for high-load energy users. We expect similar results in Mexico.
3. How C&I Businesses in Other Regions Operate in Competitive Energy Markets
Simply put, C&I firms across the US have contracted with independent energy suppliers when given the opportunity.
In Texas, where market structures penalize C&I customers that stay on the default utility tariff, it should be no surprise that 97% of C&I customers with at least 1MW in aggregate demand source their energy through a competitive supplier.
This trend is not limited to Texas. In New Jersey (PJM), we’ve found that 87% of C&I customers with 1MW in aggregate demand contract through independent suppliers. In Illinois (PJM/MISO), 92% of similar C&I firms source competitively.
We expect Mexico will be no different. As the market matures, more and more industrial customers will leave the utility tariff and shop for competitive rates.
The Takeaway: Why Industrial Firms are Leaving the Utility Tariff in Mexico
Mexico’s competitive energy sector is growing fast. Industrial firms are leaving the CFE tariff as they find lower price opportunities in the retail space. Uncertainty around future CFE prices is also fueling the exodus.
As the CFE loses these customers to retail suppliers, it will have to compensate for the lost revenue. How this will impact the CFE's remaining industrial customers is unclear.
Independent energy suppliers offer industrials the ability to both reduce costs and protect budgets, but fully capitalizing on this opportunity requires a comprehensive understanding of the market. On Wednesday, June 21, two of Enel X’s energy market experts will participate in a live webinar hosted by Energy Manager Today to discuss what businesses need to know about navigating the complexities of Mexico’s newly competitive market for energy supply.