Implications of Persistent Optimism in Electricity Demand Forecasting

by Jed Bailey | July 16, 2015   

 

Official projections persistently overestimate Mexico’s electricity demand growth. This has led to a chronic overbuild of new power generation capacity and sustained high reserve margins. In the past, power plant and natural gas pipeline developers have not felt the impact as they displaced higher cost oil-fired generation. Looking forward, however, this trend will skew spot market and auction prices alike.

  • Official projections persistently overestimate Mexico’s electricity demand growth. The most recent forecast in the 2015 Programa de Desarrollo del Sistema Electrico Nacional (PRODESEN) continues the trend with a base case forecast of 4.0 percent average annual growth and a low case of 3.0 percent average growth.
  • This has led to a chronic overbuild of new power generation capacity and sustained high reserve margins. Official electricity demand projections are used to estimate the need for new power generation capacity. The time required to plan and build new power plants means that expectations for peak demand 3-5 years in the future drive current decisions for new construction.
  • Power plant and natural gas pipeline developers have not felt the impact as new projects displaced higher cost oil-fired generation. This sustained period of overbuild has been masked as new higher efficiency and lower marginal cost natural gas-fired power plants have displaced older, more expensive fuel oil-fired steam units.

  • Looking forward, however, this trend could skew spot market and auction prices alike. As Mexico transitions to a competitive market model, CFE’s expectations for future demand will play a critical role. As the sole provider of Basic Service to regulated consumers, CFE’s outlook will largely determine the volume of capacity and energy to be auctioned.

 

 

 

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