Mexico’s Long-term Auction Practice Manual: Between the Market and the State
by Jed Bailey | November 24, 2015
On November 19, 2015, the Practice Manual for Long-Term Auctions was published in Mexico’s Federal Register, paving the way for the first auction under the new electricity market. The Practice Manual builds upon the Market Bases by further elaborating the auctions’ timing, structure, and process.
This report reviews the Practice Manual’s main components, analyzes the potential effect of key details, and discusses the implications for auction participants.
Like the Market Bases, the Practice Manual describes a highly complex market with elements of open competition and direct government intervention. Special accommodations are also made for the initial auctions in recognition that the infrastructure and institutions required to manage the auctions are still under development. Key observations for auction participants include:
- The auction structure reflects deep ambiguity on the role of markets and the state. It is critical for all auction participants to pay close attention to the details and understand the implications that each clause may have on any bid to be made.
- It favors intermittent renewable energy sources -to a point. Excluding energy contracts for thermal power plants suggests that they are expected to sell capacity in the long-term auction but then sell energy in the (yet to be defined) medium-term auctions or the spot market.
- Basic Suppliers have a lot of influence. Like the capacity to combinable energy ratio noted above, another key factor to watch is the ratio between combinable energy and CELs.
- Combinable energy price and volume adjustments may be too complicated to reduce financing costs. Risk adverse financiers may wait to see how the system proves out before reducing the risk premium for renewable projects.
- Beware the devils hiding in the details. It may take a few iterations of the auction process to identify other problematic clauses, or potentially years before the full effects of any hidden risks are felt.