The North American Process: Steps Toward Stronger Partnership A Working Symposium Hyatt Regency, Phoenix March 30-31, 2016 North American Electricity Primer Sapna Gupta Senior Policy Analyst, Morrison Institute for Public Policy, College of Public Service and Community Solutions at Arizona State University Where are we now? Electricity generation in North America totaled 5,202 terawatthours (TWh) in 2014, with the U.S. generating 4,297 TWh (83%), Canada 615 TWh (12%) and Mexico 290 TWh (6%) of the electricity in North America. 1 The electricity trade occurs on a bi-lateral basis, between Canada and the U.S and between the U.S. and Mexico. According to the U.S. Government s Quadrennial Energy Review (QER): Energy Transmission, Storage, and Distribution Infrastructure (April 2015), the U.S. and Canadian electric grids are fully interconnected, with more than 30 transmission connections. 2 The Western Electric Coordinating Council (WECC), the Midwest Reliability Organization, and the Northeast Power Coordinating Council (NPCC) operate under federal oversight and manage the grid between the US and the Canadian provinces along the U.S. border. The WECC and the Electric Reliability Council of Texas (ERCOT) connect to Mexico s National Electricity System (SEN) in a more limited capacity. (Please see the Appendix for maps of the electrical grid.) Canada is a net exporter of electricity to the U.S. The U.S. Energy Information Administration (EIA) reported that 60 Canadian companies exported 59.4 TWh of electricity into the U.S. in 2014, amounting to 10% of Canadian electricity generation and 1.6% of retail sales of electricity in the U.S. Canada imported 12.8 TWh from the U.S. that same year, about 3% of the Canadian electricity generation. Connections between the U.S. and Mexico s SEN are limited in number and capacity. There are five active interconnections and eight emergency backup interconnections located on the Baja California California border and on the Tamaulipas and Coahuila border with Texas. Arizona Public Service, a the largest electricity provider in Arizona is one of the select U.S. utilities which transacts power with Mexico, selling a very limited 1 BP Energy Charting Tool; http://tools.bp.com/energy-chartingtool.aspx#/st/electricity/dt/generation/unit/twh/country/ca/mx/us/view/map/. 2 U.S. Quadrennial Energy Review (QER): Energy Transmission, Storage, and Distribution Infrastructure (April 2015) ; http://energy.gov/sites/prod/files/2015/04/f22/qer-all%20final_0.pdf. 1
amount of electricity to Mexican companies in San Luis Colorado, Sonora. In 2014, Mexico exported 7.1 TWh of electricity to the U.S. and imported less than 0.5 TWh from the U.S. 3 Electricity prices are higher in than in the U.S. and Canada. The reforms have reinvigorated cross-border interest. A recent press release by Mexico s Secretaría de Energía (SENER) indicated that for the March 2016 auction, there were 81 prospective domestic and international bidders requesting prequalification to sell a total of 102 million MWh of power even though the Comisión Federal de Electricidad (CFE) was only offering to purchase a total of 6.4 million MWh. At the same auction, the CFE was also looking to purchase 500 MW of capacity and 6.3 million Certificados de Energias Limpias or Clean Energy Certificates (CELs). 4, 5 The three North American countries have a different electricity generation profile. The majority of Canada s electricity is generated from hydropower while hydropower provides 9.4% of the electricity in Mexico and only 7% in the U.S. The significant portion of U.S. power generation is achieved through coal and natural gas. The charts below list the generation profile for each country. Electricity Generation by Fuel Type, 2014 for Canada and 2013 for Mexico Source for Canada and US: Canadian Electricity Association; Source: SENER, Prospectiva del Sector http://www.electricity.ca/media/electricity101/electricity101.pdf Eléctrico 2015 2029; Electricity Generation in the U.S. by Fuel Type, 2014 3 U.S Energy Information Agency; https://www.eia.gov/electricity/annual/html/epa_02_13.html. 4 https://es-us.noticias.yahoo.com/81-empresas-subasta-el%c3%a9ctrica-largo-102200612.html 5 https://www.mayerbrown.com/mexico-hosts-first-electric-power-auction-03-25-2016/ 2
. Where are we going? The North American Electricity Market is evolving due to structural energy reforms in Mexico, the growing use of natural gas combined cycle for electricity generation due to the boom in natural gas extraction and a growing use of renewable energy. As part of its sweeping reforms of the energy sector, Mexico has opened up power generation to the private sector, with the expectation that competition will drive electricity prices downward. Major elements of the reform of the electricity sector include: Opening up the state monopoly (CFE) to competition with private generators and retailers of electricity and ancillary services An independent system operator, Centro Nacional de Control de Energía (CENACE) will operate the national electric grid A target for generating 35% of its electricity through clean energy by 2024 A Clean Energy Certificate program allowing CELs to be tracked traded; one CEL is equal to one megawatt hour of clean energy generation The oil and gas boom in North America have accelerated the shift from coal- and dieselbased electricity generation to that powered by natural gas. While some of this shift has begun and the conversion to natural gas-powered generation is expected to continue, the transformation might be slower due to falling diesel prices. Over the long term, diesel-based generation is expected to be replaced by natural gas-based generation. The adoption of renewable energy sources such as solar, wind, geothermal as well as hydropower is expected to increase due to falling prices and innovation in the sector as 3
well as due to public pressure due to concerns about global warming and pollution. Official government targets in the case of Mexico and provincial and state clean energy targets in the U.S. and Canada will also accelerate the adoption of clean and renewable sources of electricity. The growing adoption of renewable energy may lead to a North American market for renewables spanning Canada to Mexico, including a North American market for tradable CELs. Economic considerations / viability The cost of diesel fuel relative to natural gas is a driving factor in the investment of power generation plants that use natural gas. As the solar and wind energy industry innovates and brings down the cost of production, they are expected to become more competitive with traditional forms of power generation. Technology could also accelerate the development of cost-competitive sources to store solar and wind energy, further altering market fundamentals. Mexico s CFE has announced that it would tender projects for nearly $10 billion. The opportunities in the Mexican market are likely to drive investments in the country in the near and medium term. Political considerations / viability In Mexico, the reform is being rolled out and is expected to be fully implemented. All three countries have stable political systems and the impending U.S. presidential elections notwithstanding, neither country is expected to significantly alter the existing course of action. Concerns about climate change and rising waters in Northern Canada, the Alaskan coast and the east coast in the U.S. may create public pressure to accelerate the shift from polluting power plants to renewable and clean-burning sources of generation. Some impact on distribution lines is being felt along the Alaskan coast and Policy recommendations 6 Develop a North American mechanism to address issues related to energy transmission in a centralized manner rather than through various departments and ministries. Coordinate efforts to modernize the grid and natural gas transmission points along the U.S.-Mexico border. Develop open standards that enhance connectivity and interoperability on the electric grid. Establish uniform methods for monitoring and verifying energy efficiency. Streamline and harmonize the permitting process for North American for generation and transmission to make cross border projects easier to get off the ground and to develop economies of scale. 6 Recommendations include those listed in the QER. 4
Invest in repairing and replacing an aging infrastructure. The grid needs to be modernized and made more reliable. The Edison Electric Institute has estimated that by 2030 the U.S. electric utility industry would need to make a total infrastructure investment of $1.5 trillion to $2.0 trillion, of which transmission and distribution are expected to account for about $900.0 billion. Increase North American collaboration and coordination on planning, modeling, or forecasting activities to achieve greater efficiencies and improve each country s ability to reach economic, security, and environmental goals. Recognize the growing interdependency between natural gas and electricity transmission by streamlining regulations that govern the siting and construction of both. Consider developing a North American market for trading CELs. Sapna Gupta Senior Policy Analyst, Morrison Institute for Public Policy, College of Public Service and Community Solutions at Arizona State University 5
Appendix Illustrative Data and Information on North American Electricity Mexico s National Electricity System (SEN) 6
Connection Points Between the U.S. and Mexico s Electricity Grid 7
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