Column: CFE’s bet on Greater Mexico’s market share means more combined cycle power plants

Editor’s Note: Mexico Gas Price Index from NGI, a leader in tracking natural gas market reform in Mexico, offers the following column by Eduardo Prud’homme as part of a regular series on understanding this process. The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

The Mexican government wants to give its state champion, the Comision Federal de Electricidad (CFE), more market share in the generation segment. It aims to do this by eliminating its competitors. Current electricity sector rules do not prioritize private companies over CFE, or vice versa. Rather, power allocation is assigned based on variable production costs and technology reliability. Today, CFE cannot really compete successfully. Its high variable costs, explained by the use of diesel and fuel oil in several of its plants, a number of workers which entails enormous administrative expenses and the obsolescence of its equipment are the reason why CFE does not bring more energy to the electrical system. The problem is not the rules but the operating conditions that prevail at CFE.

The energy reform proposed by President Lopez Obrador may not garner enough votes to pass Congress. But changes will and are happening in the industry. The Comision Reguladora de Energia (CRE) does not allow new generation permits to private companies. At the same time, CFE has implemented an ambitious plan to build new factories. Its goal is to have an additional 9,075 MW online by the third quarter of 2024. CFE has planned 1,000 MW of photovoltaic energy in Sonora and 25 MW of geothermal energy in Veracruz. There are significant doubts about the transmission capacity around the Sonora project. The rehabilitation of the hydroelectric dams will barely increase the installed capacity by 305 MW (3% of the planned total). About 85% of the additional capacity will come from gas-fired or internal combustion combined-cycle plants.

In other words, the rescue of CFE will mean a lot more natural gas capacity. In recent days, 2,261 MW of new projects have been announced. CFE entrusted the contractors directly with carrying out the work. Mitsubishi Power will be in charge of the 422 MW combined cycle power plant in San Luis Potosí and the 932 MW combined cycle power plant in Salamanca. The consortium formed by TSK and Siemens Energy will develop the 256 MW El Sauz II plant, also with combined cycle technology. Wärtsilä won two projects in the northwest of the country with internal combustion for a total of 630 MW.

Fuel for the San Luis Potosí, Salamanca and El Sauz power plant projects has no other way to be supplied than through pipelines that carry imported gas. The obvious route for the 45 MMcf/d needed for El Sauz II is the Sur de Texas-Tuxpan pipeline followed by Transportadora de Gas Natural de la Huasteca, or Naranjos-Tamazunchale-El Sauz.

The Salamanca plant would need 150 MMcf/d of gas from the maritime pipeline. This would depend on the completion of the Tuxpan-Tula route, which requires a route change that avoids areas of social conflict north of Puebla. As this scenario does not seem conceivable in the short term, the supply would come from the Fermaca system, which transports gas from the Waha basin in Texas. The San Luis Potosí plant needs 75 MMcf/d of natural gas with the capacity that CFE has contracted in Sistrangas. Imports would go through Cd. Camargo (where the Ramones project begins) and cross the Gasoductos del Noreste and TAG systems. Alternatively, with the authorization of an interconnection at Villa de Reyes and with a countercurrent service through the Sistrangas, San Luis Potosí could receive gas from Waha commercially.

In the case of the Wärtsilä projects, the gas supply would experience short-term complications. The 40 MMcfd needed for San Luis Río Colorado and the 85 MMcfd needed to power Mexicali do not have a guaranteed upstream gas supply or the gas branches needed to transport the gas in the last few miles.

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In Baja California Norte, in the summer, there are significant levels of congestion in the connection between North Baja and the Rosarito Pipeline. In recent years, the peak in demand for electrical energy has led to the implementation of emergency protocols by the electricity dispatch operator Cenace. This protocol involved dispatching at any time of the day for a few months to the producers participating in the system. This protocol has aroused the interest of several companies to invest in production projects in the region. However, the scarcity of gas in the region prevented its completion. The challenge for CFE in this area is to conclude trade and investment agreements to achieve an upstream expansion of the Rosarito pipeline or an extension of some of the systems it uses in Sonora. It could be an extension of the Samalayuca-Sásabe system operated by Grupo Carso or a branch of the Sásabe-Puerto Libertad-Guaymas system operated by IEnova. Perhaps even a virtual pipeline with liquefied natural gas transported by tankers could be a solution.

Before leaving office on October 1, 2024, President López Obrador wants to see profound changes in the energy sector. This would be his great legacy. Its power system would serve the national interest and not obey the whims of private companies, he said. But as it does everything possible to support CFE, the purchases of gas imported from the United States and the combined contribution of numerous private gas pipeline companies are essential. It is impossible for all the gas that Mexico needs to be produced by Petróleos Mexicanos and transported only through the Cenagas system. In the electricity production segment, CFE could theoretically win out over its competitors. But the technology and the fuel will be imported. Mexican energy sovereignty will always depend on Texas gas and German, Japanese and Finnish know-how.

Prud’homme played a central role in the development of Cenagas, the national gas pipeline operator, an entity created in 2015 as part of the energy reform process. He began his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming Chief Economist and, from July 2015 to February, was General Manager ISO for Cenagas, where he oversaw the technical, commercial and economic management of the nascent integrated natural gas system (Sistrangas). Based in Mexico City, he heads the Mexican energy consultancy Gadex.

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