Mexico’s electricity demand is growing rapidly, and the government is planning to add 24 GW of capacity by 2010. It is looking to the private sector to help finance the expansion.

Mexico’s electricity sector is facing a challenge faced by many countries before it: meeting rapidly growing electricity demand, and introducing reforms in a way that will attract investors as well as fulfil the social elements of government energy policy.

Natural gas will become a major fuel source in the Mexican power generation sector representing numerous opportunities for gas turbine and related equipment OEMs
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This is no doubt a tough challenge, and many before it have failed. Yet the government of President Fox is clearly aware of the impact that power shortages would have on the country’s economy, and is committed to introducing reform and attracting the private sector to invest in its energy infrastructure.

Speaking at the Siemens-Westinghouse Symposium in February, Mexico’s undersecretary for energy, Francisco Barnes de Castro, was clear about his country’s needs. Over the next ten years, demand for electricity will rise 70 per cent, while demand for natural gas will increase by 120 per cent. By 2010, the government wants to see installed capacity rise from 40 080 MW to 64 000 MW.

Electricity demand is expected to grow at 5.5 per cent per year over the next few years, while natural gas demand will grow by eight per cent per annum. And this is despite a slowdown in the economy.

The government’s energy policy has two other key objectives: to ensure sustainable economic growth and development, and to free public resources that can be redirected to activities with a high social impact. And while 95 per cent of the population has access to electricity, some rural areas still require electrification.

The power market is currently dominated by two public power companies: the Federal Electricity Commission (CFE) and Luz y Fuerza Centro (LFC). CFE accounts for 92 per cent of generation, while LFC accounts for two per cent.

Since 1992, some private sector involvement in the power industry has been allowed through independent power producers (IPPs) and industrial generation. IPPs can build and own power generation facilities, and can sell the power to industrial companies or to public utilities under long term contracts. Private projects account for eight per cent of generation.

There are currently three proposals in Mexico’s congress for reforming the power sector, and a fourth is expected soon, according to Jed Bailey and Lisa Pearl of Cambridge Energy Research Associates (CERA). President Fox is keen to see legislation passed this year.

Fox’s own National Action Party (PAN) has proposed reforms designed to create opportunities for the private sector without privatizing CFE and LFC. Under this proposal, CFE and LFC would be split into separate generation and distribution companies, and the generation sector would be opened up to private participation. Spot and contract markets would be introduced. Transmission would be operated by an independent transmission company, and an independent public regulator would oversee the market. In addition, the PAN proposals include modification of tariffs to reduce subsidies and improve transparency, as well as legal reform.

These reforms are designed to encourage private participation in an electricity sector in need of investment not only in generation, but also in transmission. Public finances will continue to be invested in the sector alongside private finance.

According to de Castro, some $34bn of investment is required over the next six years to expand and modernize the Mexican power sector, $20bn of which is required for new generation capacity and transmission and distribution projects. The government expects some $17bn to come from the private sector to back IPP and build-lease-transfer projects. Over the next ten years, power generation by private permit holders will increase at an average annual rate of 14 per cent.

At least 27 new power plant projects will be opened for bidding between 2002 and 2006, representing 16 500 MW of new capacity. Together with 17 new power plants scheduled for completion by 2006, these projects will bring the country’s installed capacity to 64 000 MW by 2010.

But the addition of new generating capacity to the grid will present Mexico with another challenge.

Around 85 per cent of the 7500 MW of capacity scheduled to come on line in the next four years is natural gas fired combined cycle plant, as will be most of the 16 500 MW to be opened for bidding by 2006. By 2010, natural gas will account for 52 per cent of generation, and 55 per cent of the expected increase in gas demand will be driven by the power generation sector.

Mexico has abundant resources of natural gas, but a lack of investment in exploration over the last few years means that the country will become increasingly dependent on imports from the USA. By 2005, imports will account for 25 per cent of supply, said de Barnes.

Environmental protection is a key government policy, and exploitation of the country’s wind, geothermal and hydropower resources will also improve energy security and diversity. Currently, only 17 per cent of Mexico’s hydropower potential of 53 GW is used, as is 40 per cent of its geothermal potential and 0.1 per cent of its wind power potential. The government is keen to see expansion in the renewables sector; of the 16 500 MW of capacity to be developed by 2010, 5 MW is slated to be geothermal, and 2255 MW hydropower.

The cogeneration sector will also see expansion, especially in heavy industry. At least 6000 MW of additional capacity will be added to the country’s current installed capacity of 3000 MW.