Hot temperatures and a tightly committed supply stack are the main drivers behind the record-high power prices, demand peaks, and system energy costs seen across Mexico this summer. With strong and volatile network congestion in both the upper grid and the Peninsular area, it makes for an interesting season. As we approach fall, the wholesale electricity market’s (MEM) fundamentals will gradually evolve into a different, potentially cheaper, price environment. Upcoming storms with rekindled cyclonic potential may put a break on incremental load, resulting in a lower pressure on the national interconnected system (SIN). Clashing meteorological phenomena between the country’s north and center/south makes it clear that weather will continue to be a key driver behind MEM price dynamics.
Key Takeaways:
- The week of July 23-27 was tough for Mexico’s and southern U.S. power markets alike. Record-strong cooling load, restricted gas supply and pricing action took their toll on wholesale prices.
- Citing inconsistencies in its network model, the Mexican ISO retroactively slashed day-ahead (DA) prices for specific dates of that week. But system glitches set apart, seasonal factors supporting bullish LMPs were anyway linked to a tight supply-demand balance.
- As Mexico enters a new season, congestion is set to remain volatile and therefore impactful on SIN-aggregate, on-peak average prices.
A Wild Summer: Power Prices Reach New Heights
As typically seen in Mexico, this summer is marked by volatile and expensive wholesale day-ahead prices. May saw particularly strong, heat-driven load and congestion levels with critically low operating reserve margins — at some point of less than 3 percent — putting the national grid to the test. Heavy storms brought some respite between early June and mid-July, decreasing temperatures and subsequently, interzonal peak demand.
The big event hit on Wednesday, July 25, when locational marginal prices (LMPs) skyrocketed to historic levels. DA on-peak averages (OPAs) reached almost US$570 per MWh at the SIN-aggregate level, almost four times more than the previous day and over two times above the second-highest value registered in the MEM (i.e. on June 23, 2016). A week later, the National Center for Energy Control (CENACE) announced that it detected an inconsistecy in its network operations model, prompting a price correction process. It retroactively slashed that day’s LMPs by 72 percent to a SIN OPA of US$158.
Backward adjustments like this are not uncommon. More mature U.S. power markets also resort to verification procedures to recalculate prices whenever inaccurate. As per CENACE’s Market Surveillance Manual, this measure applies every time systemic events push error margins beyond the 5 percent threshold. The ISO then reevaluates market participant accounts under its day-ahead and balancing settlement and billing rules. But system glitches set apart, the week of July 23-27 was tough for power markets along the Mexico-U.S. border. As shown in the chart below, DA clears were expensive during that period for CAISO and ERCOT (see our blog Confluence of Gas & Power Events Drives SoCal Gas to Record Highs with More Heat Coming). In fact, these two markets saw the highest LMPs ever since early 2016, when Mexico’s MEM kickstarted—July 23 for ERCOT and July 24-25 for CAISO.
Market Fundamentals: The Hand that Rocks the Cradle
No market price correction came after the record highs registered by either CAISO or ERCOT back then, meaning that LMPs were largely sensitive to the forces beneath them. Together with extremely hot temperatures, tight natural gas supplies and cross-regional pricing action took their toll on wholesale power prices. These were the same seasonal factors behind that week’s surge in Mexico’s DA clears. How did they affect the MEM? Let’s take a look at the fundamentals:
- Demand: CENACE set an aggressive demand peak of 44.2 GW for July 25. This BalDay forecast came in reaction to the 44.3-GW mark that real consumption hit the day before, the highest ever reached in the MEM. The ISO’s projection was for the most part accurate. Mexico’s northern regions drove significant upside in the form of cooling load, in some areas facing maximum temperatures of above 41° C (that is, almost 106° F). Both the Norte demand control region and the Baja California (BCN) isolated system were particularly vulnerable, given their respective geographical proximity to Southern California and Texas, two key electricity and natural gas pricing locations across the border. The BCN market underwent a price verification itself for July 25-27, due to inconsistencies that CENACE noticed in the 07IVY-230 elementary node that interconnects with CAISO SP15 via the Imperial Valley. Not surprisingly, the week of July 23-27 accumulated most of the critical-hour occurrences in the SIN so far this year (i.e. 33 out of 100), according to Genscape’s PowerIQ 14-day demand forecasting tool.
- Supply: The supply stack was not in its best shape against that week’s demand lift. The system’s marginal energy cost (MEC) went from US$127 to US$531 day-over-day, representing over four times the boost. This movement strongly correlated with the general increase in LMPs. Genscape’s PowerIQ and Natural Gas Analyst platforms helped monitor critical changes in the natural gas-fired generation component. For example, LNG recepits in both the Altamira and Manzanillo terminals dropped to a cumulative 792 MMcf/d, or 10 percent less than the average seen in the preceding seven days. This affected outputs from key power generating assets such as the Manzanillo Complex in the mid-Pacific, as well as different combined-cycle plants around the Tampico load zone in the Mexican gulf coast. On top of that, numerous thermal plant outages shocked the system, accumulating over 2.6 GW on Monday, July 23. The inertia from successive contingencies was felt until Friday that week, since not all of the capacity came back online as quickly as needed. Add a predominantly weak wind energy profile, with daily production peaks of less than 1.2 GW in the Oaxaca state, and you get why the power generating fleet was so tightly committed.
What Next? Keep an Eye on Congestion
With a month left of this summer, the hardest days seem to have already passed for the system. Maximum temperatures will start a soft decline as Mexico gradually phases into a new season. Wholesale price shocks are nonetheless still a possibility, with volatile congestion posing a major risk. Just pick the typical outliers in the SIN and make your conclusions. Since May 3, when this year’s 100 Critical Hour period began, marginal congestion costs (MCCs) in both the northern regions and the Peninsular (PEN) area are moving up and down the roller coaster. That whole month was in fact the most difficult for the upper SIN zones. Norte (NTE) fell into a source-sink dynamic with the flanking Noroeste (NOR) and Noreste (NES), alternating incremental power imports, contributing to the strongest positive MCCs ever. This culminated in crazy prices in NTE on May 31, just shy of $400 dollars for the DA on-peak average, with individual hours coming in as high as $650. For context, the highest PJM West Hub DA clear of the polar vortex in the U.S. earlier this year was $644, with a peak hour of $947.
The influence that NTE had on the system is now stemming from PEN. Since early July, congestion in the Yucatan Peninsula is more unstable and thus more impactful on SIN-aggregate prices. Driven by consistently strong MCCs, this region’s upside is currently masking any weather-induced bearishness from net importing load zones of the Central (CEL), Oriental (ORI) and Occidental (OCC) areas. This setting will likely continue for the rest of August and during most part of September as the hurricane season regains momentum, bringing more drastic swings in southeastern Mexico’s temperatures. Only the fall will allow for a cooling off effect that will contribute to the expected shift in MEM price dynamics. OPAs will become generally lower against current levels as ramping generation from combined-cycle hotspots in the NOR - NTE - NES corridor flows into the large demand centers in Mexico’s heart. Yet interzonal price separation will remain, precisely because congestion—whether negative in the upper SIN or positive in PEN—will continue to underscore the structural imbalances facing the national grid.
Be sure to stay tuned and feel free to reach out to learn how Genscape’s Mexico Power Market services can provide a leading edge in the day-ahead market. Access power market fundamentals for the SIN with our PowerIQ platform, which includes forecast loads for bal-day, day-ahead, and 14 days, as well as detailed information on DA prices, marginal cost components, cross-regional dynamics and more. To request a free trial, please click here.