Cash-Hungry U.S. Power Producers Lured by Mexico Energy Reforms

  • Cheap California, Texas power putting squeeze on producers
  • Newly opened Mexican market offers promise of higher returns

U.S. electricity producers seeking a salve for low prices at home and growing competition from solar and wind power are exploring whether to make a bet on Mexico’s sputtering energy revolution.

This year, for the first time, Mexico will allow independent companies, including those from outside the country, to compete in selling wholesale power. In anticipation, at least three top U.S. producers have held talks on entering the new market, according to Alfredo Alvarez, Ernst & Young LLP’s energy sector leader in Mexico City. He declined to identify the companies, but said the talks were spurred by the tough conditions they face at home.

Electricity prices have plunged over the past year in the U.S. and demand has flattened as grid operators have turned increasingly to renewables for cheaper, cleaner power. In Mexico, meanwhile, less efficient plants fired by coal and fuel oil routinely carry higher operating costs, giving U.S. companies an edge in a country where the payoff can be twice as high, Alvarez said in an interview.

In the U.S., “it isn’t a pretty picture on demand and supply,” said Paul Patterson, a New York-based analyst for Glenrock Associates LLC who covers the utility industry. “Any potential opportunity to sell power in another market could be welcome news.”

Initial Auction

Mexico’s National Electricity Control Centre, or Cenace, is scheduled to hold an initial wholesale power auction next week. A list of pre-qualified bidders released on Tuesday included more than 80 companies and consortiums.

Among them is a Mexican affiliate of San Diego-based Sempra Energy, which owns a plant in Mexico that’s been supplying power to the California grid over the past decade, according to Cenace. Spokesmen for Sempra and its affiliate, IEnova, did not immediately respond to e-mails sent after business hours seeking comment.

Also on the list is Fisterra Energy, a unit of New York private equity firm Blackstone Group LP, which separately won permission last year from U.S. regulators to export to Mexico all of the electricity from a power plant it owns in Texas. A message seeking comment left Wednesday at Blackstone’s corporate headquarters was not immediately returned.

Among the U.S. suppliers that have been vocal about their struggles in the U.S. southwest are Calpine Corp., Dynegy Inc. and Talen Energy Corp., whose shares have fallen 33 percent, 52 percent and 60 percent, respectively, over the last 12 months. Micah Hirschfield, a Dynegy spokesman, and Todd Martin of Talen both declined to discuss their companies’ policies on Mexico.

Calpine Interest

Calpine, meanwhile, is weighing several options in Mexico, according to a person familiar with the talks. The company hired Jorge Lechin, an executive who specializes in the Mexico market, in September and has discussed ideas that include exports from an existing plant, selling power from a third-party or forming a joint venture to open a plant inside Mexico, said the person, who asked not to be identified because the talks were private. While the company won’t bid next week, it may in the future, the person said.

In a statement, Calpine declined to comment “on any plans related to development efforts (including but not limited to the upcoming auction) in Mexico at this time.”

Mexico President Enrique Pena Nieto’s energy reforms, announced in 2013, have had a spotty history. In August, Mexico’s first auction of offshore oil leases drew less than half the 30 to 50 percent government goal. In bidding rounds since, the government has done better, selling 30 of 44 areas auctioned, including 100 percent of the onshore fields made available to companies including Rome-based Eni SpA and London’s BP Plc.

In December, Pena Nieto said on Twitter that the onshore success shows “confidence in Mexico and the future of its energy industry.” Now, power production is on the line, and the weakness of the U.S. market for conventional generators may help lure them.

Mexico’s Cenace began making power prices public on Jan. 27, and U.S. operators are monitoring to see if joining the market gives them an edge, Alvarez said. Last week, Leonardo Beltran Rodriguez, a deputy secretary at the Ministry of Energy, said Cenace will be explicitly asked to study increased trading with the U.S. The comments came in a conference in New York on Mexico’s energy future.

Higher Prices

Non-peak prices in Mexico were in the mid $55-$65 a megawatt-hour range across Mexico last year, said Peter Nance, a principal with Fairfax, Virginia-based ICF International Inc. who examines trends in the utility industry. That compared with an average of $30.55 a megawatt-hour in Southern California and $24.78 a megawatt-hour in Houston, according to grid data compiled by Bloomberg. Spot prices there were even lower Wednesday, averaging $21.36 a megawatt-hour in Southern California and $14.49 a megawatt-hour in Houston at 11 a.m. New York time.

Mexican prices fell in the first few weeks after open trading began on Jan. 27, averaging in the $30-$40 a megawatt-hour range. But they’ve since bounced back to the $50 range as the fledgling market settled, Ernst & Young’s Alvarez said.

While Mexico can produce more power, the inefficiency of their coal and fuel oil-fired plants has led to under-utilization, according to Alvarez. Combine that with demand growth of 3 to 4 percent a year and the 10 to 15 gigawatts of plant retirements expected within eight years, and there’s plenty of room for U.S. companies to operate, he said.

Excess Power

California and Texas have so much power that, at times, producers have been forced to stop generating, or pay users to take output.

California Independent System Operator Corp, the grid covering that state, can export as much as 8,000 megawatts of excess power at any given time without hurting reliability, according to Steve Berberich, the chief executive officer, in a November interview. In December, the Electric Reliability Council of Texas Inc., a grid offering some of the cheapest power in the U.S., boosted excess power it expects over the next decade thanks to new generation resources coming online.

Beyond the lure of rising demand and higher prices, Mexico’s reformed power market also offers the potential for payments to producers that agree to keep electricity on reserve to be used during times of high demand, according to Alvarez. The so-called capacity payments, not used in California or Texas, are used in the PJM Interconnection LLC market that serves the eastern U.S., he said.

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