Opportunities and Challenges

(1)

Current International

Perspectives on Smart Grid

Developments in Mexico in

Light of Energy Reforms

Presented to: Austin Electricity Conference

UT Executive Education and Conference Center,

1900 University Ave, Austin, TX 78705

Peter K. Nance – Que Advisors

Opportunities and Challenges

Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge. Page 1 28-Apr-16

(2)

Items of Interest

1. Investor Outlook – Electricity and Natural Gas Overview

2. Conclusions

3. Value Added by Que Advisors

4. Appendix – Major Trends In North America Energy

Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge. Page 2 28-Apr-16

(3)

Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge. Page 3 28-Apr-16

(4)

CFE View of Smart Grid

Traditional Components, Changing Rules, Implication for Implementation

Source: CFE

Que Advisors | Rethink.Redefine.Research. | Confidential | Do Not Distribute Page 4 28-Apr-16

(5)

Smart Grid Development in Mexico

Drivers, Who Is Involved

Source: Que Advisors

Page 5 28-Apr-16

• Smart Grid development likely to be closely linked to the growth of renewable

energy resources, enabling larger amount of variable resources to be integrated.

Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge.

Acronym Title/Function

SENER Ministry of Energy

SHCP Ministry of the Treasury SE Ministry of the Economy SFP Ministry of the Controller

CFE Modernization, Distribution, Customer Services, Operations CENACE ISO, including Planning, Transmission, Generation

CRE Regulatory Commission

CONUEE Energy Efficiency Commission PROFECO Consumer Protection Agency NOM Standards Organization

(6)

Expected Developments

Roadmap

• Multi-Disciplinary Planning – Academia. – Regulatory/Government. – Industry. • Initial Investments. – Focus: • Outage Detection. • Poor Power Quality.

• Distribution Transformer Conditions Before Failure. • Sensing Devices to Improve Telemetering.

– Benefits:

• Outage Detection. • Voltage Management. • Restoration.

• Power Quality Monitoring.

• Transformer Preventative Maintenance. • Precision and Time-Stamped Meter Reading.

• Precision and Time-Stamped Consumption Information. • Real-time Operational and Locational Information.

Source: CRE, Que Advisors

(7)

Expected Developments

Major Areas

•

Consumers:

– Focus and Rights

• Privacy.

• Access to Information.

• Consumer Control Over the Use of Consumer Energy Data.

•

Integration With Wholesale Markets:

– Focus:

• Security Concerns, Critical Infrastructure.

• Nodal Design, Medium and Long Term Planning Integration Needed.

• Integration with Transmission Planning Process.

•

Challenges:

– Retail Subsidies. – Redesigned Tariffs.

– Aggregation Rules and Detailed Regulations.

– Reliability Criteria and Metrics – Increased Reliability?

Source: CRE, Que Advisors

(8)

Investors During the Transition

Observations About Power Deals Reviewed

Source: Que Advisors

Page 8 28-Apr-16

• 1Q2016 auctions have shifted focus to investment under “New” rules for clean

energy. Situation still challenging for combined cycle projects independent of CFE. Difficult to structure in the absence of PPAs and marketing entities. Project finance structures challenging; bias for larger amounts of equity; favors corporates.

• Overall, investment depends in part on market design specifics that CENACE and

stakeholders develop as well as forthcoming policy vehicles.

Type Description Status

Traditional CFE RFP’s Power generation and gas pipelines. Continue strong in 1H2016. “Special Situations” Border Gen/Transmission assets Continue of interest in 1H2016. “Clean Energy” Renewable generation. Slowed between 2H2014 and

2H2015; renewed activity 1H2016.

“Clean Energy” Cogeneration projects. Continue of interest in 1H2016. Structures and economics vary.

(9)

First Clean Energy Auction Results - 1Q2016 - Wind

Company Plant MW GWh State CF CEL (t) USD/MWh

Acciona Energy El Cortijo 168 586,000 Tamaulipas 40% 586 $42.90 Aldesa Chacabal I 30 113,000 Yucatán 43% 113 $59.80 Aldesa Chacabal II 30 118,000 Yucatán 45% 118 $59.80 Energía Ren. De la

Peninsula Energía Ren. De la Peninsula 90 276,000 Yucatán 35% 276 $66.00 Con. Energia

Limpia 2010 Tizimín 76 292,000 Yucatán 44% 292 $67.00

Subtotal 394 799,586 1,385 $64.56

Source: CEANCE, Que Advisors

(10)

First Clean Energy Auction Results - 1Q2016 - Solar

Company Plant MW GWh State CF CEL (t) USD/MWh

Enel Green Power Villanueva 330 973,000 Coahuila 34% 973 $35.50 Enel Green Power Villanueva 3 250 738,000 Coahuila 34% 738 $38.40 Enel Green Power Don Jose 207 539,000 Guanajuato 30% 539 $45.20 SunPower Guajiro 2 100 269,000 Guanajuato 31% 264 $44.50 Recurrent Energy Aguascalientes Pot 1 90 141,000 Yucatán 18% 141 $48.00 Sol de Insurgentes Sol de Insurgentes 23 61,000 Baja Calif Sur 30% 61 $48.10 JinkoSolAQ Las Viborillas 100 277,000 Jalisco 32% 277 $47.40 JinkoSolAQ Concunul 70 176,000 Yucatán 29% 176 $58.40 JinkoSolAQ San Ignacio 18 49,000 Yucatán 31% 49 $63.40 Vega SolAQ Ticul 1 500 740,000 Yucatán 17% 725 $57.40 Photoemeris Kambul 30 55,000 Yucatán 21% 53 $68.60

Subtotal 1,718 4,018,000 3,996 $45.22 Source: CEANCE, Que Advisors

(11)

Smart Grid Drivers

Vary Globally

CFE Latin

America/Caribbean Europe/Eurasia East/AfricaMiddle Asia/Oceania

1 Lowering power losses

in the national system Reliability Improvements Integration with Renewable Energy Optimizing Energy Consumption Reliability Improvements 2 Enterprise

Architecture for IT Power Quality Improvements Demand Response and Management Reducing Operating and Maintenance Costs Power Restoration Improvements 3 Strengthening customer comm systems Improving revenue

collection and assurance; reduction of commercial losses

Reducing Operating and Maintenance Costs

Reducing Losses Optimizing Energy

Consumption 4 Asset Management

Systems Power System Restoration Improvements

Integration of Distributed Energy Resources

New and Improved Services for the Customer

Reduce Operating and Maintenance Cost

5 Institutional system of

GIS Energy Efficiency Power Quality Improvements Improved Revenue Collection and Assurance

Power Quality Improvements

Source: ESTA international survey of International Smart Grid Drivers, Que Advisors

Additional Mexico-Specific Issues: Retail Customer Classes, Retail Subsidies, Energy Poverty, Unmet Demand, Market Rules in Transition, Interconnection Rules and Long Implementation, CEL Credits, Capacity Market Participation.

(12)

Page 12 28-Apr-16 Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge.

(13)

Mexico Electricity Sector Reform

Source: SENER, Que Advisors

Page 13 28-Apr-16

Milestones Reached

– Independence of system operator. – General consensus on market design.

– First system expansion plan (PRODESEN 2015--2029). – Conceptual design for CFE separation.

– Start of operations for Spot Market – Plan for CFE Restructuring

– First auction for long term clean energy and CEL contracts

Next Steps

– First successful auction for long term conventional energy contracts – Implementation of CFE Restructuring

– First contracts and associations for transmission – Market enhancements

(14)

Mexico Electricity Sector Reform

Smart Grid Issues to Watch For

Page 14 28-Apr-16

– Reliability metrics. – Reliability upgrades.

– Demand response and distributed resources are contemplated. Further clarity

on bidding/aggregation processes developing.

– Development of more robust stakeholder processes.

– Scarcity pricing definition and management part of Stage 2 market.

– Certain adjudication functions of the Market Monitor to be determined.

– The role and structure of Supplemental Reserves and Ancillary Services as part

of Stage 2 market.

– Implementation of forward products and contract terms envisioned – energy,

“power” (“capacity”), and clean energy – especially longer or extendible.

– Settlement process of forward commitments – between generators and

capacity-responsible load serving entities.

– Details on CENACE and SENER establishment of a Clearinghouse.

• Our initial view is that product standardization will be difficult without a

Clearinghouse in Stage 2.

(15)

Major Trends in North America Energy

Electricity

Page 15 28-Apr-16 Que Advisors | Rethink.Redefine.Research. | © | If Cited, Please Acknowledge.

(16)

Mexico Wholesale Production Costs

Sample Region - CTCP

Source: CFE, CRE, Que Advisors

Page 16 28-Apr-16 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 6/4 6/18 7/2 7/16 7/30 8/13 8/27 9/10 9/24 10/8 10/22 11/5 11/19 12/3 12/1712/31 2013 2014

MX Pesos MX Pesos USD USD 2013 2014 2013 2014 1% 355.84 407.91 $23.13 $26.51 5% 388.78 455.42 $25.27 $29.60 10% 416.62 480.53 $27.08 $31.23 50% 1,578.95 573.81 $102.63 $37.30 90% 2,063.06 1,550.08 $134.10 $100.76 95% 2,188.16 1,654.21 $142.23 $107.52 99% 2,467.55 1,823.61 $160.39 $118.53 Max 4,429.03 2,078.43 $287.89 $135.10 Min 302.71 340.58 $19.68 $22.14 Med 1,579.08 573.83 $102.64 $37.30 Avg 1,279.37 763.42 $83.16 $49.62 Constant Exchange Rate = $0.065 USD/Mx Peso

(17)

Mexico Retail Energy Prices

Existing Tariff Structures

•

Retail electricity prices in Mexico

vary widely between different

consumer classes and regionally.

•

Agriculture and Residential

consumers have the lowest

tariffs, with agriculture clients

paying less than a third of the

second least expensive group.

•

Medium and large enterprises

pay roughly the same tariffs as

industrial and residential clients.

•

Customers in the services and

commercial sectors pay the

highest retail tariffs.

Source:. CFE, CRE, SENER, Que Advisors

Page 17 28-Apr-16 0.00 0.05 0.10 0.15 0.20 0.25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Average Electricity Retail Tariff by Type of User (USD $/kWh at Constant Exchange Rate)

Residential Services Commercial Agriculture Industrial Medium Enterprises Big Enterprises

(18)

Mexico Electricity Sector Reform

Initial Timeline

Source: CFE, CRE, SENER, Que Advisors

Page 18 28-Apr-16

2015 2014

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Market CENACE’s Creation SENER Contract Creation CRE Power Market Operation SENER

First Market Rules SENER

Transmission and

Distribution

Regulates Rates SENER

National Electric System Development Program SENER

Power Industry

Regulations of the PI SENER _{Restructuring of the CFE} SENER

Terms of Separation of CFE SENER

Clean Energy

Guidelines on Clean Energy SENER Requests for Interconnection CENACE

Clean Energy Requirements SENER

Geothermal Round 0 SENER _{Geothermal Round 1} SENER

Auctions for Basic Supplies CENACE

2016 – 2018: Full market implementation Draft Market Rules issued February 24, 2015 January 1st_2016: Wholesale market begins operation End of 2015: Publication of Draft rules and market operations manual

Late 2015: Restructuring of CFE

(19)

Historical Timeline

Page 19 28-Apr-16

Item Date Content

Constitution Dec 2013 • Competition in generation/retail; contracts and PPP • Vertical and Horizontal separation

Secondary Laws Aug 2014 • Wholesale Electricity Market • Independence of Regulators

CENACE Aug 2014 • Creation Decree

Universal Service Sep 2014 • Creation of the Electrification Fund

Bylaws Oct 2014 • Permit requirements, system planning process

Clean Energy Oct 2014 • Guidelines for granting CEC and establishing

requirements

Importation Dec 2014 • Import rules prior to market start

(20)

Historical Timeline

Page 20 28-Apr-16

Item Date Content

Market Rules Feb 2015 • Electric Power Market Bases (consultation)

Clean Energy Mar 2015 • Clean Energy Certificate Requirements

Interconnection Jun 2015 • Interconnection Criteria

Planning Aug 2015 • System Expansion Program

Associations Aug 2015 • Designation of transmission projects For PPP

(21)

Timeline/Milestones

Page 21 28-Apr-16

Item Content Date

DAH and RT Markets for Energy and AS Testing

Operation Sep, 2015Stage 1: Jan, 2016.

Stage 2: 2017 and 2018. Long Term Auctions for Capacity, Energy and

Clean Energy Certificates PublicationAdjudication Contracts

Oct, 2015 1Q2016 2018

Assignment of Legacy FTRs Oct, 2015

FTR Auctions Testing

Operation Sep, 2016Stage 1: Oct, 2016 Stage 2: Jan, 2017

Capacity Market Testing

Operation Oct, 20152Q2016 Medium Term Energy and Capacity Auction Publication Oct, 2016

(22)

Timeline/Milestones

Page 22 28-Apr-16

Item Content Date

Clean Energy Certificate Market Testing

Operation 20182018