Trade-offs in electricity planning in Mexico

Abstract

Electricity generation is a vital element of economic growth, and it is necessary to encourage a growth model that does not endanger the capacity of a country to generate electricity. Generating electricity entails costs. This cost is not only economical but can also be, for example, environmental. This implies that there are different trade-offs associated with choices about how to generate electricity, such as technologies, fuels, impact on the environment, construction costs, budget constraints and so on. The Federal Government owns Mexico’s electricity sector. As such not only does it write the rules of the electricity sector but it also executes these rules. The government has stated a series of guiding principles regulating the electricity sector. These guiding principles reflect the priorities that should be taken into account when designing electricity portfolios. My thesis uses financial tools to offer a new approach to the problem of developing electricity portfolios. I assume that the electricity generation mix can be seen as a portfolio of assets. Using portfolio management techniques, I demonstrate scenarios for efficient portfolios given key assumptions about generation choices and prevailing costs. I also illustrate the implications of prioritizing one guiding principle over the other in terms of portfolio cost. Finally, my use of a portfolio modeling approach highlights the complexities inherent in public policy making given the technical and cost-driven nature of the electric power businesses and value chains. My work provides a possible method for more productive evaluation of various approaches in light of mixed priorities and the broad diversity of stakeholders in Mexico.