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DRAFT FOR DISCUSSION

Summary of the Power Market Rules draft April 2015

www.pwc.com/mx

DRAFT FOR DISCUSSION PwC

Note:

• This document has been prepared as an aid in reading and analyzing the Electricity Market Guidelines draft

sent to the COFEMER last February. The report is not intended to be exhaustive but merely to set forth some

of the principal points of the draft.

• This publication has been prepared exclusively to offer general guidance on certain matters of interest, and

should not be considered to qualify as professional advice. It is not advisable to act on the basis of the

information contained herein without securing proper professional advice. We do not expressly or explicitly

guarantee the accuracy or integrity of the information contained in this publication, and within the limits

allowed by law, PricewaterhouseCoopers S.C., its members, employees and agents accept and assume no

responsibility or obligation pertaining to the actions, decisions or omissions made by you or others on the

basis of the information contained herein.

2

PwC


Contents

• What is the status of the power sector's transformation process?

• What are the Market Rules?

• What are the guiding principles behind the Rules?

• What do the Rules govern regarding products and market modalities?

• What are the main agents subject to the Rules?

• Which assets are represented by market participants? and Which conditions apply to each of them?

• How will the Wholesale Electricty Market work?

• What are the parameters for injection and withdrawal offers?

• How will these transactions be carried out?

• How will market operations be modeled?

• How will the locational marginal price be calculated?

• What types of nodes will exist? and What types of vectors are there?

• What is established regarding Financial Transmission Rights (FTR), Clean Energy Certificates (CECs), medium and long-term auctions and Capacity markets?

• What are the time frames for implementation?

• How can PwC help your company?

3

PwC

http://images.uncyc.org/commons/e/ee/Lightbulb_jon_phillips_01.svg


Once the Electricity Industry Law and the Regulations thereto have been approved, there are a great many actions, rules and regulations that must be applied. Drawing up Market Rules is a fundamental part of this process; the draft was submitted to the Federal Regulatory Improvement Commission (COFEMER) in late February.

(1) LIE: The Electricity Industry Law

(2) CEC: Clean Energy Certificate

(3) NES: National Electricity System

Source: Adapted from the Schedule contemplated by the SENER, PwC 4

The

Electricity

Market

Transmission

and distribution

The

electricity

industry

2014 2015

Aug Sep Oct. Nov Dic Jan Feb Mar Apr May

. Jun Jul. Aug Sep Oct. Nov

Dec

.

First market rules Rules

Electricity Market Operations

Clean energy

Universal

service

Creation

of the

Fund

CENACE Decree

Creation

NES(3) development

program Program

Contract models Resolution

Regulated rates Resolution

LIE

Regulations(1) Regulation

Formal

statement

Clean energy

guidelines Resolution

CEC

requirements(2) Resolution

Auction for basic

supply Operation

Terms for CFE

separation Resolution

CFE Restructuring Legal

separation

Interconnection

permit requests New criteria

Geothermal Power Round 0

CFE Award Bidding

processes:

Temporary

imports Resolution

CENACE

Responsible

Agents:

CRE

SENER

We are here

What is the status of the power sector's transformation process?

PwC


Market Rules were structured on the basis of hierarchy. Each of the provisions in those rules must be consistent with the respective ascending hierarchy. The document submitted to the COFEMER covers the Market Guidelines (MG), which is to be followed by manuals, guidelines, criteria and procedures.

Market Guidelines Establish the principles for the design and operation of the Wholessale Electricity Market (WEM)

referred to in the Law.

Mark

et

Ru

les

Market Practice Manuals Will establish the principles for calculations, instructions, rules, guidelines, examples and the

procedures for administration, operation and planning of the WEM. Each chapter of the Market

Guidelines will be developed in detail in a Market Practice Manual (tentatively there will be 10 manuals).

Each chapter of the Market Bases will be set down in detail in a Market Practice Manual (there will tentatively be 10 manuals).

Operating Guidelines The Operating Guidelines will establish formulas and procedures which, given their complexity and

specificity, are contained in documents other than the Market Practice Manuals, as required.

Operating criteria and procedures Will establish the specifications, technical notes and operating criteria required for implementing the

Electricity Market Guidelines, the Market Practice Manuals or the Operating Guidelines when designing

software or for day-to-day operations.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, Presentation Dr. César Hernández 10-2014, PwC

What are the Market Rules?

5

PwC


The Market Guidelines (MG) are the foundation for the new Wholesale Electricity Market (WEM), which are based on the principles of efficiency, competitiveness and security.

6

What are the guiding principles behind the Rules?

• The National Electric System should be promoted in conditions of efficiency, quality, reliability, continuity, security and sustainability.

• The WEM will at all times attempt to ensure the equality of conditions for all Market Participants.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC

PwC


The MG establish the principles of design and operation for the WEM and set forth the rules and procedures to be followed by the Participants in order to market energy, Ancilliary Services, CECs, Capacity and FTR, among others(1) in different modalities.

7

(1) The CENACE payments for Off-Market Services will include the following charges and payments: i) Transmission Service; ii) Distribution Service; iii) Market Operation and System

Control Service; iv) Ancilliary Services not included in the Market (Reactive Reserves, Reactive Power and emergency start-up Service). The CRE will determine Regulated Rates for

all off-market services.

(2) As from 2018, the DAM and the RTM will be complemented by an Hour Ahead Market (HAM).

(3) Ancilliary Services included in the market are: Regulation Reserves, Rolling Reserves, Operating Reserves and Supplementary Reserves. Those not included in the market are:

Reactive Reserves (voltage control, availability for injection or withdrawal MVAr), Reactive Power (voltage support, injection or withdrawal of MVAr) and emergency start-up.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC Analysis

Day Ahead Market

(DAM)

From 1 hr

to 1 day before

Short term

Medium term

Long Term

WEM

Capacity Financial

Transmission Rights (FTR) Clean Energy

Certificates

(CECs)

From 1 month

to 3 years

From 3 years to

10 years

Real Time

Market (RTM)

Energy

Ancilliary

services(3)

Terms Market

modalities Products

Hour Ahead Market

(HAM)(2)

Auctions

Assignments

Funding

What do the Rules govern regarding products and market modalities?

PwC


Market Participants (MP) are Generators, Marketers, Suppliers, Non-supplying

Marketers and Qualified Users (QU) Participating in the Market . With the exception of the Non-supplying Marketers, MPs register and represent assets throughout the value chain by contracting with CENACE.

8

Market participation modalities

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC

Market Participant

Generator

Marketer

Supplier

Qualified User

Market Participant

Distributors and Transporters are not

considered to qualify as MPs and will sign

agreements with the CENACE to establish

the rights and obligations of each party.

What are the main agents subject to the Rules?

MP Agreement

MP representing assets

MP not representing assets

Not MP

Not exhaustive

PwC


Market Participants will represent Power Plants (PP) and/or Load Centers (LC), depending

on contracts with the CENACE(1). Each MP contract must specify a single market participation modality. However, each MP may establish multiple ledger accounts for its registration at the CENACE, which will share the credit line as if they were a single MP.

9

MP assets

(1) Owners of Power Plants and Qualified Users not complying with requirements for being a MP may only purchase and sell energy and Ancilliary products through the Supplier.


Not exhaustive

Market Participants Represent

Generators Power Plants (PP) in the market

Intermediation Generators Represent the PP and Load Centers (LC) included in the Legacy

Interconnection Contracts in the market

Qualified Market Participant

User

Represents LC in the market for own consumption or for consumption

within its facilities.

Suppliers Represent LC in the Market for the consumption of other End Users in

the modality of Basic Supplier, Qualified Supplier or Last Resort

Supplier.

Non-Supplier Marketers Conduct transactions in the Market but do not represent fixed assets.

Which assets are represented by market participants? and Which conditions apply to each of them?


10

Status for registering Power Plants


Not exhaustive

Dispatchability + -

+

Ava

ila

bil

ity

1 2

3 4

1

2

3

4

Steady non-dispatchable: A steady source lacking the capacity to

control its production level in real time (such as certain

cogeneration or geothermal facilities). That units are not exempt

from CENACE instructions when required due to Reliability.

However, in the economic dispatch, it is assumed that the

production is fixed at the most recent value measured or at the

forecasted value.

Steady dispatchable: A source with the capacity to follow

dispatch instructions in real time up to its installed capacity (e.g.

Combined cycle, conventional thermoelectric or carboelectric).

Intermittent non-dispatchable An intermittent source lacking the

capacity to control its level of production in real time (e.g. wind or

solar power without the capacity to reduce generation by means of

automatic dispatch instructions). This units are not exempt from

CENACE instructions when required due to Reliability. However,

in the economic dispatch, it is assumed that the production is fixed

at the most recent value measured or at the forecasted value.

Intermittent dispatchable A source with the capacity to follow

dispatch instructions in real time up to its intermittent capacity (e.g.

wind or solar with the capacity to reduce generation by means of

automatic dispatch instructions)

Ste

ad

y

Inte

rmitte

nt

Not dispatchable Dispatchable

Geo Co-generation:

Cycle

Combined

Conventional

thermoelectric

Carbon

Solar with no

reduction

capacity

Wind with no

reduction

capacity

Wind with

reduction

capacity

Solar with

reduction

capacity

How will generators register?

The Power Plants must register with a status according to its capacity (steady or intermittent) and its dispatchability. The status “non-dispatchable” may be validated by the Market Monitoring Unit; in the case it determines a source is “dispatchable”, this Unit may order a change of status.


…Depending on the generation technology, different conditions will apply to Pre-Reform Interconnection Contracts (PRIC) when part of the capacity of those plants is to be included in the Market . SENER will determine the independent entity that will represent as Independent Generator for Power Plants and Load Centers.

11

Conditions applicable to Legacy Interconnection Contracts

(1) The total registered capacity of a Power Plant Unit may not exceed its installed capacity. The CENACE and the CRE may conduct periodic tests to verify the installed capacity.

(2) The portion of the PP registered with a Generator may not be assigned any of the empty startup and operating costs of the complete PP.

(3) The ELC will be assigned this segment of the complete PP incremental cost curve corresponding to the capacity included in the ELC contract, while the LIC will be assigned the

highest cost segment of the complete PP incremental cost curve corresponding to the capacity not included in the ELC contract.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015,PwC Analysis

Not exhaustive

Pre-Reform permits

• Self-supply

• Co-generation

• Small production

• Imports

• Exports

• Continuous

Own Uses

Independent Power Producer

(IPP)

External Pre Reform

Power Plant Contract

(EPRLC)

MWregistered (1)

=

MWLIC + MWGenerator

If a portion of the capacity is included in new Generation Permits

If MWIEP = MWCFE + MWAutosupply

The owner of the Power

Plants must register at

CENACE the

capacity it which is to

operate in the Generator

modality (MWGenerator)

Applies when the IPP

overestimated the Power

Plant capacity to sell surplus

to third parties

Renewable sources

Efficient cogeneration

Conventional sources

Renewable or

conventional sources

MWLIC MWGenerator

The energy produced will be automatically

assigned to the different PRIC and the

Generator in all hours, in proportion to the

capacity registered under each scheme.

Only surplus

The Generator may select the segment of the

complete PP incremental cost curve to be

assigned to the portion of the power plant

registered with the Generator(2)

1° 2nd

Technologies Conditions

Energy assignment

The energy generated will be assigned first to the

Generator representing the EPRLC in the

electricity market, up to the amount of energy

included in its optimum dispatch The remaining

energy will be assigned to the PRIC (3)

Pre-reform

Interconnection

Contracts (PRIC)

What conditions apply to legacy interconnection contracts that register part of their capacity on the new market?


In view of the fact that marketers represent no assets, they will engage in virtual transactions(requiring no physical injection or withdrawal of energy) or bilateral purchase and sale financial transactions (requiring physical delivery), assisting the other MPs to protect themselves from changes in the Locational Marginal Price between the DAM and the RTM.

What conditions apply to the traders?

Virtual transactions (as from 2018) The price of virtual transactions(1) is the price at which MPs intend to

sell or purchase energy in the DAM. Virtual transactions are financial

because they do not require the physical injection or withdrawal of

energy. Generally used by MPs to protect themselves against

changes in the Locational Marginal Price(2) between the DAM and

the RTM.

(1) Virtual transactions are permitted as from 2018.

(2) See the following slides for a description of the Locational Marginal Price and the NodeP.


Ma

rke

ter

Bilateral Financial Transactions Fixed transactions (a fixed number of MW), or referenced

transactions (a percentage of generated or consumed energy) that

allows the MP to transfer the financial responsibility for the energy

or the Ancilliary Services included in the Market (but not the

physical supply of energy or Ancilliary Services) between a

purchaser and seller.

Energy Ancilliary

Services

DAM

RTM

1st A position of purchase or sale is taken in the DAM.

2nd The position taken in the DAM must be paid in the RTM.

Virtual sales offer An offer to sell energy on the DAM Not necessarily supported by a

Power Plant MP must submit: i) amount in MW, subject to credit

limits and volume limits established by the Market Monitoring Unit; ii)

Location (NodeP (2) ); iii) hours to which the offer applies; iv) price of

the offer (minimum price of energy that the seller intends to accept in

the DAM.

Virtual purchase offer An offer to purchase energy on the DAM does not necessarily

represent the intention to consume energy in the RTM. MP must

submit: i) amount in MW, subject to credit limits and volume limits

established by the Market Monitoring Unit; ii) Location (NodeP (2) );

iii) hours to which the offer applies; iv) price of the offer (maximum

price of energy that the seller intends to pay in the DAM.

Energy

Fixed financial transactions in a NodeP(2), conducted on the

DAM.

Financial transactions fixed or referenced in a NodeP(2) conducted

in the RTM.

Bilateral financial sales transaction The seller transfers its rights to the energy or Market Ancilliary

Services to the purchaser. The CENACE will charge the seller for

the energy of Ancilliary Services included in the Bilateral Financial

Transaction multiplied by the market price of the energy or the

Ancilliary Services. The seller is responsible for collecting from the

purchaser in a bilateral transaction; the CENACE is not involved in

that transaction.

Bilateral financial purchase transaction The purchaser acquires the rights to the energy or Market Ancilliary

Services from the purchaser.

The CENACE will credit the purchaser for the energy of Ancilliary

Services included in the Bilateral Financial Transaction, multiplied by

the market price of the energy or the Ancilliary Services.

Sale

Purchase

12


Suppliers will take part in the Market under three modalities: Basic, Qualified or Last

Resort Supplier. The CENACE will have no responsibility for regulating rates under these modalities. Suppliers must cover all requirements of the Load Centers and Exempt Generators (1) they represent (energy, capacity, Ancilliary services, transmission, distribution and system control).

13

Rules applicable to Suppliers

(1) The owner or holder of one or more PP not having or requiring a generation permit.

(2) Suppliers must secure permission from the CRE to offer the supply of electricity or represent Exempt Generators.


Not exhaustive

Supplier(1)

Suppliers of Qualified Services A permit holder which offers the Qualified Supply to the QU and may represent (in the WEM) Exempt

Generators in a competence regime. Qualified Supply is provided in a competence regime to the QU.

Suppliers of Basic Services A permit holder offering Basic Supply to Basic Supply Users and representing (in the WEM) Exempt

Generators requesting to be represented. Basic Supply is provided under tariff regulation to any party

requesting it that is not a QU.

Last Resort Supplier A permit holder offering Last Resort Supply to QUs and representing (in the WEM) Exempt Generators

requesting to be represented. The Last Resort Supply is provided to the QU at maximum prices for a limited

time period in order to ensure continuity of the service when a Supplier of Qualified Services no longer

supplies electricity.

• Will assume no responsibility for tariff regulation under any of these modalities.

• Will verify the term of the permit before assigning the respective Load Centers to a Supplier.

• Will have no direct relationship with the End Users or Exempt Generators represented by the Suppliers.

• Will have no knowledge of the terms under which Suppliers will remunerate users for activating the Controllable Demand

Recourse and dispatching the Power Plants they represent.

Considerations

Permit(2)

What conditions apply to the suppliers?


Qualified Users will take part in the Market under two modalities: Qualified Users Participating in the Market or Qualified Users represented by a Supplier. Registration is optional for Users that comply with requirements, except for Load Centers not previously supplied by the Public Service (CFE) at the time the LIE went into effect.

14

Rules applicable to Qualified Users (QU)

(1) The SENER will determine and make a downward adjustment to levels of consumption or demand so as to allow End Users to be included in the register of QU. The

SENER will also establish the terms under which End Users belonging to the same economic interest group may add their LCs in order to reach the demand or consumption

levels in question. Adjustments to those levels will been made known in advance when determined by the SENER.

Source: LIE, Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC Analysis

Not exhaustive

Qualified

Users

QU Market Participant Represent their own Load Centers in the Wholesale Electricity Market and purchase

electric energy and Ancilliary Services directly in the Market and/or under Coverage

Contracts.

QU Represented by a Supplier Those whose Load Centers are represented in the Wholesale Electricity Market by a

Qualified Supplier or temporarily by a Last Resort Supplier.

• The CRE will handle the registration of QU and ensure that they have registered the End Users that are required to register.

• The following LC are required to register as QU when:

• At the date on which the LIE went into effect (August 12, 2014) they had no contract for the supply of Public Service

Electric Energy due to the demand to be included in the Basic Supply.

• The following LC may be included in the QU register when:

• They have been included in the Legacy Interconnection Contracts at the date on which the LIE went into effect (August

12, 2014), regardless of demand.

• They report demand of at least three MW in 2015 (two MW in 2016 and one MW in 2017)(1).

• They are partially supplied via a Legacy Interconnection Contract and partially via basic supply. The entire LC may be

included in the QU Registry.

Considerations

Registration

What conditions apply to qualified users?


The CENACE must plan and control the operation of the electricity network in coordination with Transmission and Distribution Companies in order to ensure the reliability of the electricity network under its responsibility.

15

Rules applicable to Transporters and Distributors

(1) Suppliers must secure permission from the CRE to offer the supply of electricity or represent Exempt Generators.


Not exhaustive

Transporters Distributors

Transporters and Distributors must:

• Sign agreements with the CENACE for networks corresponding to the WEM.

• Determine operating capacities and limits and report them to the CENACE.

A Transmission Company must:

• Operate and maintain its transmission

facilities and equipment in a manner

consistent with the reliable functioning of

the National Transmission Network.

• Ensure proper functioning of load cutoff

procedures and systems in emergency

situations.

• Ensure the existence of control, supervision

and safe communication systems.

• Immediately inform the CENACE of any

changes in the capacity of its transmission

facilities.

• Punctually comply with instructions issued

by the CENACE, including instructions to

connect or disconnect facilities or

equipment to/from the NES.

A Distribution Company must:

• Operate and maintain its distribution facilities and

equipment in a manner consistent with the reliable

functioning of the NES.

• Assist the CENACE in complying with its reliability

responsibilities.

• Ensure that emergency load cut off arrangements and

procedures are effected as specified by the CENACE.

• Report immediately to the CENACE any change in the

capacity of its equipment or distribution facilities

connected to the NES that could affect reliable

functioning of the NES.

• Provide the CENACE with functional descriptions,

equipment capacities and operating restrictions for

distribution equipment at the facilities operating within the

NES.

• Comply punctually with the instructions issued by the

CENACE, including those involving disconnecting from

NES facilities or equipment operated by the CENACE, for

reasons of Reliability.

What conditions apply to transporters and distributors?


WEM includes Auctions, the Capacity Market, the Day Ahead Market, the Hour Ahead Market and the Real-Time Market, which will make it possible to balance injections and withdrawals to and from each node, thus ensuring adequate availability of energy and reserves in the system.

DAM RTM

How will the Wholesale Electricity Market work?

24 hours prior to delivery 7 days

before

• Establishes the assignment and

economic dispatch of PPUs .

• Issues binding financial

programs for the generation,

loading and virtual transactions

in each hour.

• Provides MPs with startup

instructions after concluding

economic dispatch of the DAM

Ma

rke

t

fun

cti

on

Offers to increase generation or

reduce demand. Assignment and

dispatch of Power Plant Units

(PPUs).

Exte

nd

ed

ho

rizo

n P

PU

assig

nm

en

t(3

)

Auctions(1)

Satisfying the needs of the

Entities Responsible for Load

(ERL) and facilitating the

investment of generators.

1 year before

(term: 1, 3 and 10 years(2))

(1) There will be three types of Auctions: i) Medium-Term Auctions for a Load Participation. The intention is to guarantee that, prior to the DAM, Basic Suppliers have a net expected position

of close to zero (neither purchaser nor seller) in order to reduce their exposure to spot market prices; ii) Auctions for Long-Term Power, clean energy and CECs. The purpose is to

guarantee a stable source of payments that will cover fixed investment costs of new electricity plants in order to reduce the risk of new investments, and also to stabilize the cost of

complying with CEC requirements by Market Participants signing the resulting contracts. However, other ERLs and Generators may take part in those auctions for other reasons, and iii)

Auctions of Financial Transmission Rights: After assigning legacy FTRs, the remaining transmission capacity will be auctioned off, and the proceeds will be refunded to all the ERLs.

(2) Medium and Long-Term Auctions and Financial Transmission Rights Auctions will be held annually (unless Practice Manuals specify otherwise). For Medium-Term Auctions, contracts will

begin the year following the year in which the auction is held and will be for three-year terms. For Long-Term Auctions, the contract term will begin three years following the auction and will

be for a term of ten years. The FTRs auctions will be for terms of 1, 3 and 10 years.

(3) AUGC-HE, AUGC-DA and AUGC-S are Assignments of Power Plant Units to maintain Reliability, 7 days before, 1 day before and after the DAM, respectively.


• May set up a clearinghouse to

act as a counter-party in MP

contracts.

• For FTR CENACE, will make

available 20% of the expected

network capacity.

Capacity market

A tool which allows ERLs

and Suppliers to comply

with minimum reserve

planning requirements.

• Will calculate the value

of the specific obligation

on the basis of CRE

requirements. That

requirement could be a

percentage of maximum

demand/peak demand.

1 year P

PU

assig

nm

en

t o

n D

ay A

head

(3)

PP

U (

3) S

up

ple

men

tary

Assig

nm

en

t

Making adjustments required by

changes in estimated demand or

in the availability of PPUs or

system conditions.

• Analyzing contingencies and

identifying security restrictions.

• Calculating non-dispatchable

resources. • Frequency regulation.

• Calculating Locational Marginal

Prices by means of economic

Dispatch and reassignment of units

with security restrictions.

• Penalties for noncompliance.

1 hour prior to the operation

Not exhaustive

16


Power Plant Units will submit offers to sell energy in the DAM and the RTM in the registration node, with their registered capacity, while ERLs will submit offers to purchase for demand only in the DAM.

What are the parameters for injection and withdrawal offers?

Generators

DAM

RTM

Entities Responsible for

Load

Offers to sell Offers to purchase

• Status of the assignment of the Recourse

offer (not available, economic, required

operation).

• Dispatch limits (economic and emergency).

• Economic offer (start-up, operation on-empty,

incremental operation, availability of reserves).

• Notification times (the difference between start-

up instructions and the point at which the PPU is

synchronized with the system).

• Start-up time (cold, warm or hot).

• Minimum operating time (minimum level of

operating hours at a minimum dispatch level

above it).

Pa

ram

ete

rs a

nd

co

nd

itio

ns

fo

r

off

ers

Ma

rke

ts in

wh

ich

off

ers

are

su

bm

itte

d

(1) See the following slides for a description of the models, Locational marginal price and nodes.

(2) Applicable beginning in 2018.


Offers of Purchase for Demand apply only

in the DAM and represent a binding

financial offer to purchase energy at DAM

prices to be consumed in Real Time on

the following day of operations.

• Submitting purchase offers ( for LCs directly

modeled by each Node P, or indirectly modeled by

each load zone (1)).

• Two types of offer

• Fixed purchase: price takers pay the Locational

Marginal Price (1) determined for the DAM for that

location of the NodeP(1). Information required:

number of MW, location of purchase, hour at

which the fixed purchase is applied.

• Price sensitive purchase: MPs may state their

intention to purchase energy at specific prices by

submitting price-sensitive purchase offers(2).

Information required: the maximum price willing to

pay per MW, hour of the offer, location.

Bala

nce o

f in

jecti

on

s a

nd

wit

hd

raw

als

at

each

no

de a

nd

eco

no

mic

dis

patc

h

Not exhaustive

17


In a typical energy transaction, Market Participants will take a position/acquire a commitment to withdraw (Load Serving Entity) or deliver (Generator) electricity or receive an amount based on the price at some future hour and date.

18

Illustrative example of electricity transactions for Generators and Entities Responsible for Load.

Source: Electricity Market Guidelines - PwC Analysis

Long position (purchase)

Position in

DAM Position in

RTM Real assignment of

physical energy

P

kWh @ Node P

Generator

Load Serving

Entity

Delivery of physical energy

Withdrawal of physical energy

Energy sale on the market

Energy purchase on the market

>

< Short position (sale)

>

<

Short position (sale)

Long position (purchase)

Not exhaustive

How will transactions be carried out?


Market operations will be modeled through the Physical Network Model (PNM) , which represents the electricity parameters and the topology of network elements; and of the Market Commercial Model (MCM), which is used to adjust the Physical Network Model to the needs for assigning units, dispatch of generation and market operation. The assets will be directly or indirectly modeled. Market Operating Provisions will establish criteria for determining which PP and LC will be indirectly modeled.

Physical Network Model (PNM)

Detailed model of the type of node/switch for

operating control of the National Electricity

System (NES).

• Power Plants

• Load Center

• Transmission and distribution lines

• Transformers

• Switches and blades

• C Nodes

Market Commercial Model (MCM)

A model used to operate in the energy and

Ancilliary services market, adjusting the

PNM topology as per the need to assign

units, the dispatch of generation and

operation of the WEM.

Commercial Invoicing Model (CIM)

A model used to locate physical injections

and withdrawals of energy and other

products to the NES under the

representation of each MP to Nodes P in the

MCM at specific time intervals. As well as

the assignment of payments for injections

and withdrawals.

• Representation of aggregate PPUs, aggregate Controllable

Demand resources, distributed PP and LC

• Definitions and requirements for the Regions of Ancilliary

Services and Interregional Transmission Links [brokers].

• Distribution vectors for trading hubs and Distribution Vectors

for Load and Generation

• NodesP Aggregates and NodesP Distributed(1),

• Relationship between the Indirectly Modeled LC and the

corresponding Distributed NodesP(1).

• The relationship between the Indirectly Modeled LC and the

corresponding Distributed NodesP(1).

• Load curves and generation curves, ...

Models used to represent market operations

(1) See the following slides for a description of the Aggregate and Distributed NodesP.

(2) Directly Modeled: Power Plant or Load Center individually included in the PNM. Indirectly Modeled: Generating Power Plants and Load Centers not explicitly represented in

the MCM but defined in the CIM.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC Analysis.

How will market operations be modeled?

Directly modeled (2)

Indirectly

Modeled (2)

Not exhaustive

19


The algorithm for economic dispatch will calculate the marginal price of energy in each NodeP, which will have three components: i) the Marginal Energy Component; ii) the Marginal Congestion Component, and iii) the Marginal Loss Component.

How will the locational marginal price be calculated?

P

locational

Marginal

Price

(LMP) in

Node P

Marginal Energy

Marginal Congestion

Marginal Losses Ancilliary

Services

Energy

• Calculation of the Locational Marginal Price should include all the

dispatchable Power Plant Units, including those that must be

dispatched manually (without capacity for Automatic Generation

Control).

• The algorithm for economic dispatch will calculate the marginal price

for regulation reserves, rolling reserves, total operating reserves and

supplementary reserves in each reserve region.

• Locational Marginal Prices and market prices for reserves and

regulation will be calculated in each NodeP; some of those nodes can

be defined as part of the distribution system for operating and

accounting purposes.

…

P

LMP in DAM

P

LMP in RTM

The price resulting from the Real Time dispatch program

=(1) Maximum price

In 2016 and 2017, the maximum price will be set in the production cost of the highest cost Power

Plant Unit in the respective Electric System. As from 2018, that production cost will be multiplied by

a factor of 110%, increasing by 120% in February 2018 and an additional 10% every month,

without the maximum price exceeding the value of unsupplied demand value.

<

(1) Marginal Market prices of Day Ahead and Real Time Markets will be the lesser of the price determined by the Real-Time dispatch program and a maximum price.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC Analysis.

Not exhaustive

Components of the Locational Marginal Price and parameters for calculating it

20


There are three types of nodes for modeling operations: Connectivity NodeC, invoicing or interconnection point NodeF and price NodeP

21

C

Node C

P

Elemental Node P

C C C C

PNM

Connectivity nodes (NodeC) comprise the PNM and represent sections that connect switches and blades to network components

(generators, transformers, transmission lines, reactors, static reactive power capacitors and compensators) and to other physical bars.

Directly modeled Power Plants and Load Centers More than one different equipment may be connected to the same NodeC.

The injection of energy of Directly Modeled PPs is

represented in the PNM in the respective NodeC, taking

into account any loss in the network between the

interconnection point and the NodeC.

The withdrawal of energy from Directly Modeled LCs is

represented in the PNM in the respective NodeC, taking

into account any loss in the network between the

interconnection point and the NodeC.

A price-setting node (NodeP) is a single NodeC or a set of NodesC where an injection or physical withdrawal is modeled and for which a

Locational Marginal Price is used for financial payments in the WEM.The Elemental NodeP corresponds to a specific bus network

in the MCM.

Aggregate NodeP Vector of weighting factors (adding up to 1), which can be multiplied in order to represent the median weighted

distribution of injections or withdrawals between different Elemental NodesP based on a directly modeled installation in the PNM (for

example, to represent the mixture of injections of different units at a combined cycle power plant).

Distributed NodeP Vector of weighting factors (adding up to 1), which can be multiplied in order to represent the median weighted

distribution of injections or withdrawals between different Elemental NodesP based on indirectly modeled installation (for example, to

represent the mixture of withdrawal points used at the Indirectly Modeled Load Centers in a given zone).

C1. = + C2 …


What are the types of nodes?

MCM

PD

Distributed Node P

P1 = + P2 …

CIM

F F

Node F

Invoicing Nodes (NodeF) represent the physical interconnection point of each generation Power Plant and Load Center to the

NES. This requires the installation of measurement schemes based on CENACE requirements for connecting to a NodeF.

F

PA

Aggregate Node P

P1 = + P2 …

Not exhaustive


Aggregate NodesP and Distributed NodesP are vectors of weighting factors used to represent the median weighted distribution of injections or withdrawals between different Elemental nodesP. These NodesP are defined on the basis of load and generation distribution vectors.

Load Distribution

Vector(1)

Not exhaustive

PD

Distributed Node P

PA

Aggregate Node P Represents

where [ X1 X2 X3 ... Xn]

Is a weighting factor vector Σ i=1

n

Xi = 1

What are the types of vectors?

Types of vectors referred to in the Market Guidelines

Represents the median weighted distribution

of injections or withdrawals between different

Elemental NodesP at a directly modeled

installation in the PNM.

Represents the median weighted distribution

of injections or withdrawals between different

Elemental NodesP at indirectly modeled

installations

Used to determine an Aggregate

NodeP or Distributed NodeP

representing given zone withdrawals

to supply Indirectly Modeled Load

Centers in a given zone.

Generation

Distribution

Vector(2)

Used to determine an Aggregate NodeP

representing injections of a Power

Plant.

(1) Load distribution vectors reflect the average load distribution in each load zone by NodeP, with the exception of Directly Modeled Load Centers. Load distribution vectors will

be calculated by the CENACE. Load Distribution Vectors also include energy losses between Indirectly Modeled Load Centers and NodesP, in such a way that the load

reported at those Load Centers, multiplied by load distribution vectors, shows expected energy withdrawals from NodesP for those Load Centers.

(2) Aggregate Power Plants use a single NodeP for modeling and liquefaction, even when the Power Plant has multiple units interconnected to different NodesC. If the features

of the system do not allow the replacement of a single NodeP by the multiple NodesC associated with the Power Plant (for example, if the Power Plant Units are connected

at different tension levels), the CENACE will calculate a Generation Distribution Vector based on historical performance of the different units. The Power Plant will submit

offers for a single PP in an Aggregate NodeP. The CENACE will use the Generation Distribution Vector to represent that offer at the NopdesP of the Commercial Market

Model.

Source: Draft of the Electricity Market Guidelines sent to the COFEMER 24-02-2015, PwC Analysis 22


The Market Guidelines establish Financial Transmission Rights, a Capacity Market, a CEC Market, and medium-term energy auctions as well as long-term auctions for Capacity, Clean Energy and CECs (1/2)

23

Credit instruments for financial payments,

which do not carry the right to make physical

use of the network.

The right to collect the difference in the value of

Marginal Congestion Components between the

node of origin and the destination node.

Pre-Reform (for holders of legacy

interconnection contracts and basic supply

contracts), Auctioned (the remaining

transmission capacity after legacy) and

Bilateral.

Financial

Transmission

Rights

Capacity

market

The Capacity Requirement is a Reliability tool

for complying with minimum reserve planning

requirements.

The CRE establishes 2 requirements: Capacity

for qualified suppliers and users, and future

Capacity for suppliers. The latter may comply

with their obligation by means of bilateral

contracts or basic supply auctions.

The CENACE will determine the market

closing price for Capacity by calculating the

intersecting point between offers received from

Generators and the demand curve.

Market Participants may enter into bilateral

contract for the sale and purchase of Capacity.

An Load Serving Entity may purchase Capacity

under bilateral contracts prior to realization of

the Capacity market and then use it to cover its

Capacity obligations.

What are

they? Types of FTR

What is it? Capacity requirements

Determination of the price Bilateral

What is established as concerns FTR and Capacity markets?

Capacity

FTR


The Market Guidelines establish Financial Transmission Rights, a Capacity Market, a CEL Market, and medium-term energy auctions as well as long-term auctions for Capacity, Clean Energy and CECs (2/2)

24

The purpose is to guarantee a stable source of

payments that will cover fixed investment costs of

new electricity plants in order to reduce the risk for

new investments, and also to stabilize the cost of

complying with CEC requirements by Market

Participants signing the resulting contracts.

The intention is to guarantee that, prior to the

DAM, Basic Suppliers have a net expected

position of close to zero (neither purchaser nor

seller) in order to reduce their exposure to spot

market prices.

The market will allow the purchase and sale of a

single type of CEC.

The CENACE will operate a spot market for the

periods established by the CRE for calculating the

CECs to be granted and the respective

obligations.

Offers to buy and sell at any price will be allowed,

as well as different offers for different blocks of

CEC.

Any party might purchase and sale CECs

under bilateral contracts or by means of basic

service auctions.

The Clean Energy

Certificate Market Features Conditions

The CENACE will conduct competitive

auctions in order to allow Basic Suppliers to

contract the Coverage requirements

established by the CRE for Basic Service

Users.

Other ERLs may take part in the Auctions as

purchasers; only Generators may participate as

sellers.

Four types of ERL may take part: Basic Supplier,

qualified supplier, last resort supplier and

qualified market participant user

The CRE will set requirements for all Suppliers to

enter into Electricity Coverage Contracts that will

allow them to cover their expected needs,

covering energy, Capacity and CEC.

Objective Participants:

M/T: for Load Participation L/T: for Capacity, clean energy and CEC

Medium and

Long-Term

Auctions

What is established as concerns CECs, medium and long-term auctions ?

CECs

Auctions


In order to ensure prompt startup of critical elements and maximize the efficiency of Market design, it's different components will be implemented in stages. The CECs market and the MT and LT auctions will be implemented in one single stage.

25

Schedule for implementation


3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2

08/15

1E

Tests

2E

1/18

2E

1/18

1E Operation

1E

Tests

Start

contracts

1E

1E Operation (10/16) 1E Pr

1E Operation (as from 10/15 for contracts starting in 2018)

1E

Pr

1E

Pr

1E

Tests

1E Operation (11/15) 2E 11/16

1E Operation (11/15) 2E Operation (01/17)

1E Operation

RTM

LT Auctions

(Capacity, Clean Energy and CECs)

FTR auctions

Assignment of FTR

CEC market

Capacity market

DAM

MT Auctions

(Energy)

2015 2016 2017 2018

1 Stage

Sundry

Stages

What are the time frames for implementation?

Not exhaustive


PwC offers services throughout the electricity sector value chain, with proven success rates in the Mexican market.

How can PwC help your company?

Services Results

Assistance in promoting the sector together with the

public administration and sector associations.

Devising strategies for promoting renewable energy

together with the Ministry of Energy, different state

governments, and the Mexican Wind Energy Association,

among others.

Analysis of electricity rates and marginal generation

costs.

Modeling electricity prices for financial entities and

developers, considering generation profiles for specific power

plants.

Financial and tax modeling and structuring

of generating power plants.

Participation in the financial-tax structuring

and/or review of financial models exceeding

1,500 MW multiple-technology-generation capacity.

Analysis of regulations and assistance in the design of

startup/expansion projects in the electricity sector.

Advising US utilities, Asian conglomerates, European

developers and large Mexican industrial groups concerning

their business plans in the electricity sector.

Advice on the purchase/sale of generating assets. Conducting Commercial, Financial and Tax Due Diligence Reviews for generating assets. Assistance in raising capital

and financing for development projects.

26


Contact information

Francisco Ibáñez.

Lead Partner - Capital and Infrastructure Projects

[email protected]

+52 (55) 5263 6085

Eduardo Reyes

Director of Infrastructure and Energy Strategy

[email protected]

+52 (55) 5263 8967

27

This publication has been prepared exclusively to offer general guidance on certain matters of interest, and should not be considered to qualify as professional advice. It is not

advisable to proceed on the basis of the information contained herein without securing proper professional advice. We do not expressly or explicitly guarantee the accuracy or

integrity of the information contained in this publication, and within the limits allowed by law, PricewaterhouseCoopers S.C., its members, employees and agents accept and

assume no responsibility or obligation pertaining to the actions, decisions or omissions made by you or others on the basis of the information contained herein.

© 2015 PricewaterhouseCoopers, S.C. All rights reserved Redistribution prohibited without PwC authorization. PwC refers to the member firm in Mexico and can sometimes

refer to the PwC network. Each member firm is an independent legal entity. For additional information, go to www.pwc.com/structure.

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