Cogeneration and self-supply in México: significant potential for industrial applications

A role for cogeneration has been enshrined in Mexican law since 1992, but progress towards the full potential, much of which exists at refineries and other industrial sites, has been slow. Odàƒ³n de Buen examines the reasons for this disappointing growth.

Mexico is one of the most important oil producers in the world, with an average daily production of 3.8 million barrels of oil, of which 47% are for domestic consumption. Natural gas production averaged 4.8 billion cubic feet per day in 2005, largely as gas associated with oil production.

Potential in México

According to a 1995 study by Mexico’s National Commission for Energy Conservation (CONAE), the maximum cogeneration potential in México is more than 15,500 MW à‚— assuming that all of the heat needed in industry comes from heat rejected in power generation taking place in industrial facilities (Table 1). This evaluation was made based on the primary energy requirements for the installations and has only been updated to include the potential in PEMEX oil refining.

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A large part of the potential is located in the facilities of Petràƒ³leos Mexicanos (PEMEX), the national oil company. Close to 4500 MW are located in petrochemical plants and oil refineries. The other sectors with the largest potentials are chemicals, food, steel, paper and cement, all of them with more than 1000 MW potential each.

The Public Electricity Service Law

The Public Electricity Service Law (1992)1 establishes the reach of what is considered as the electricity sector as well as the role of the State within it. The Law states that ‘ࢀ¦ it falls exclusively to the Nation to generate, conduct, transform, distribute and supply electricity aimed at public service’ and that ‘ࢀ¦ in this matter no concessions will be granted to the private sector, and the Nation will take advantage, through the Federal Electricity Commission (CFE), of the goods and material resources required for such purpose’.

It also states that ‘ࢀ¦ all actions related to the electricity public service are of the public dominion’, but, at the same time, opens up a space for private sector participation by not considering the following as public service: (a) electricity generation for self-supply1, cogeneration and small production, (b) electricity generation of independent producers to be sold to CFE, (c) electricity generation for export, which resulted from cogeneration, independent production and small production, (d)à‚ electricity imports devoted exclusively to self-supply of persons or enterprises, and (e) electricity generation devoted to emergencies resulting from electricity blackouts. In this context self supply is on-site generation but also power generated off site and sent to the grid for the exclusive use of the end user. Self-supply could be done with cogeneration (but with no surplus power).

Three of the categories are of particular interest for distributed generation.

  • Self-supply. According to the Law, this category refers to the electricity used to ‘satisfy the energy needs of enterprises or persons’, ‘provided that, in the opinion of SENER [the Energy Secretariat], it doesn’t cause any inconvenience to the nation’. A business society is required to grant a permit à‚— two or more partners à‚— which will have the objective of generating electricity to satisfy the energy needs of all parties within the society, provided that it cannot be delivered to a third party which is not part of the society. Also, energy surpluses have to be delivered to CFE. The Rule of this Act establishes that no self-supply permit will be required in the case that electricity generation is below 0.5 MW.
  • Cogeneration. Cogeneration is defined in the referred Law as ‘thermal electricity produced jointly through steam or other source of secondary thermal energy, or both, provided that such thermal energy not used in industrial processes, is used to generate electricity, directly or indirectly, or in the case fuels are produced to generate electricity, directly or indirectly’, as long as generated electricity is used to satisfy the energy needs to facilities associates to cogeneration, and provided that energy and economic efficiency throughout the entire process are increased, and as long as energy efficiency is greater than the one obtained in conventional utilities. The cogenerater is obliged to deliver energy surplus to CFE, subject to dispatch and operation rules defined by CFE.
  • Small power production. This category refers to those small producers that sell their entire electricity generation to CFE, considering a maximum 20 MW capacity per project. Also à‚— as a variant of self-supply à‚— this category applies whenever electricity generation is used for self-supply in small rural communities or off-grid areas, as consumption collectives, joint ownerships, and civil associations with projects below 1 MW.

However, although the Law allows these electricity-generation modalities, there has not been a significant development in regards to cogeneration, particularly because electricity purchase prices defined for these types of projects do not cover expected investment amortizations (since they are established considering short-term marginal costs) and electricity purchase is subject to CFE’s dispatch rules. Therefore, the most cost-effective projects are being developed under the self-supply modality, given the current tariff structure.

Status as of July 2007

By July of 2007 the Comision Reguladora de Energàƒ­a (CRE) had granted 531 permits for private power generation for 21,235 MW (not including generation for export and/or import). Of this total, 508 permits for a total of 8077 MW were granted for either self-supply and/or cogeneration.2

For cogeneration, 57 permits had been granted by CRE for a total capacity of 2,846 MW. Of this total, 53 permits for 2677 MW were in operation with an average of 51 MW per permit (Table 2).

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Of the total projects in operation, 7 permits for 550 MW are for plants operating before 1992.3

Also, 10 permits for 638 MW (an average of 64 MW) have been granted to PEMEX. These permits seem to be a formalization of plants already installed, but that were used only for self-supply, as some of the projects had self-supply permits and PEMEX officially communicated in 2006 that several cogeneration projects were under study, with none to be installed in the near future (PEMEX 2006)4. This formalization has been a result of recent changes in laws governing Mexico’s national oil company that have been aimed at increasing cogeneration in Pemex with surplus power being sold to CFE.5

Regarding self-supply, a total of 477 permits for a total of more than 5690 MW (for an average of 11.0 MW per permit) were operational in July of 2007, though only 61% of that capacity (and 92% of the total number of permits) was in operation. Average capacity per permit for the plants under construction (56 MW) is close to five times the one for those in operation (8.7 MW)

Of the total of self-supply projects in operation, 61 permits for 1041 MW are for plants operating before 1992.

Comparing the installed capacity for self-supply and cogeneration projects (not including projects installed before 1992), between June 2004 and January 2008 there was a very significant increase of 2780 MW during the period, with self-supply representing the largest share with 1980 MW (with 349 new permits for an average of 5.7 MW per permit) (Figure 1).


Figure 1. Evolution of installed capacity in self-supply and cogeneration in México (not including projects installed before 1992). Source: CRE
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The role of peak-period rates

The growth of self-supply projects has not been driven by specific promotion policies, but by high time-of-day rates applied to power sector customers with demands above 100 kW, and in particular by peak-period rates. These peak-period rates have remained above 0.17 US$/kWh for medim voltage customers for more than two years and have reached close to 0.25 US$/kWh in some regions, making many peak-shaving projects feasible (Figure 2)


Figure 2. peak-period rates for customers connected in medium voltage and with demands above 100 kW Source:à‚ CFE
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These peak-period rates do not apply equally to the whole country and don’t apply all year long. In Baja California they apply for four hours a day (14:00 to 18:00) on weekdays and from May to the end of October only. In most of the country they apply all year long on weekdays in the evening.6

These peak-period rates have been heavily criticized by the private sector in the past few months under the logic that Comisiàƒ³n Federal de Electricidad (CFE) has an unusually large reserve margin and so this type of economic penalty is not justified. In this context, some CRE officials have made public that a reduction and/or elimination of the peak-period rates is under consideration.

If such changes take place (which can be done without the authorization of Mexico’s Congress) many of the self-supply projects will be rendered economically unfeasible.

The policy initiatives

The Comision Nacional para el Ahorro de Energia (CONAE)7 has been promoting cogeneration since it was created in 1989. Through the sponsorship of many energy audits, the preparation of the National Cogeneration Potential in 1995, the organization of dozens of regional seminars, and the collaboration in the organization of a yearly international seminar, CONAE has tried to encourage investment in cogeneration.

In 1996 CONAE integrated an expert’s group (known as the Subcomisiàƒ³n de Fomento de la Cogeneraciàƒ³n) to identify barriers to cogeneration and ways to overcome them. This group has the participation of more than thirty private and public organizations and has met more than 30 times. The group has also integrated documents identifying barriers to the full development of the cogeneration potential. In 1998, in work done in direct collaboration with the Energy Secretariat, the following barriers were identified:

  • Cogenerators’ surplus power (to be sold to the grid) is subject to dispatch rules. CFE’s dispatch rules à‚— which are mandatory à‚— are based on generation costs and they favour lower cost plants. Thus, for users which may generate surplus, competing for dispatch with cheaper, dedicated generation plants is a losing game and, as a result, most cogenerators do not size their plants for surplus power. As a result, most cogeneration plants end up sized for self supply, reducing, from a social perspective, the energy efficiency advantages of a larger plant.
  • Prices of energy sold to the grid are based on short-term marginal costs. By law, cogeneration surplus can only be paid for at a price based on short-term marginal costs, thus making investment in surplus generation less attractive.
  • Electricity tariff uncertainty. Electricity rates are subject to constant changes by the Federal Government. These changes are made taking into account CFE’s need or support policies to end-users, but not the possible effects this may have on cogeneration and self-supply projects.
  • Natural gas price and supply uncertainty. The fact that Mexico maintains a natural gas supply deficit, and depends on supply from regions with highly volatile prices, causes a great uncertainty, which affects decision-making to invest in projects which use this fuel, mainly cogeneration projects.
  • The law forbids private transactions. This means that those who have cogeneration and self-supply projects cannot commercialize their electricity surplus.

In 2002, in an attempt to bring in new private capacity to the system without having to change the Electricity Law and/or the Constitution, the Energy Secretariat changed the rule of the Law that defines the capacity limits to the sale of excess power, without having to go into a bid process with CFE, from 20 to 40 MW. This change was challenged by members of the Senate opposed to the power sector reform, who asked for a review of the rule change by the Supreme Court, on the grounds that the executive branch was overextending its authority into aspects that were legislative. The Supreme Court reviewed the challenge and ruled that the change in the rule of the Law was non-constitutional, so it was not valid and had to go back to the same terms as before.

However, there have been legal changes as laws have been created and modified to promote cogeneration in PEMEX. This legal initiative will facilitate the sale of power from PEMEX to CFE. According to PEMEX, there is a 4000 MW potential for power generation, with 1400 MW to be used in self-supply and 2600 MW to be sold to the grid. Most of this potential is in the oil refining plants (2645 MW). To date, only the changes in category from self-supply to cogeneration for some of PEMEX existing plants (as referred above) have taken place.

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Another development that should be noted is the formalization of a contract authorized by RE (renewable energy) for net metering for solar projects for very small customers (up to 30 kW). This contract will initially be used for homes in a housing project located in Mexicali, Baja California where photovoltaic cells are already in place.

Conclusions

The Mexican economy could benefit from cogeneration and power self-supply. Even though it is allowed under Mexican law, regulations are not favourable for most projects and very little of its potential has been exploited. This is mainly due to the fact that excess power is subject to dispatch and that power purchase prices by the state-owned utilities are not attractive to recover capital investments.

Also, the political process resulting from a series of failed attempts to reform the power sector has complicated the situation and new initiatives go against what was gained with the 1992 Electricity Law. Furthermore, the frequent changes in Mexico Energy Secretariat (SENER) have diminished its capacity to lead the necessary changes.

Odàƒ³n Demàƒ³filo de Buen is the President, Energàƒ­a, Tecnologàƒ­a y Educaciàƒ³n SC, México City, México.
e-mail: demofilio@prodigy.net.mx

REFERENCES

1. Ley de Servicio Pàƒºblico de la Energia Eléctrica, 1992.

2. https://cre.gob.mx/

3. 1992 was the year that a new law for the power sector was put in place.

4. PEMEX 2006. Iniciaràƒ¡ PEMEX el primer proyecto de cogeneraciàƒ³n de energàƒ­a eléctrica. Boletàƒ­n de prensa 05.01.2006. https://pemex.com/index.cfm?action=content&sectionID=8&catID=40&subcatID=3743

5. Diario Oficial de la Federaciàƒ³n. “Decreto por el que se adicionan dos pàƒ¡rrafos al artàƒ­culo 6o. de la Ley Reglamentaria del Artàƒ­culo 27 Constitucional en el Ramo del Petràƒ³leo y se reforma el tercer pàƒ¡rrafo y adiciona un àƒºltimo pàƒ¡rrafo al artàƒ­culo 3o. de la Ley Orgàƒ¡nica de Petràƒ³leos Mexicanos y Organismos Subsidiarios”. January 12, 2006. de la Federaciàƒ³n el

6. https://cfe.gob.mx/es/InformacionAlCliente/conocetutarifa/

7. CONAE is a decentralized administrative agency that is part of Mexicoà‚´s Energy Secretariat, with technical and operational autonomy and the objective to serve as a technical advisory body for the agencies and entities of Mexico’s public and private sectors on issues related to energy savings, energy efficiency and renewable energy use.

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