Fuel oil costly solution for Mexican power: IOA

Mexico's use of excess high-sulphur fuel oil (HSFO) production from state-owned refineries for electricity generation is one of its costliest power sources as well as among the dirtiest, a think-tank study found.

The government has routed more HSFO to it power generators in recent years as the byproduct — less desired after stricter marine fuel emissions requirements in 2020 — can take up storage space needed for higher-value refined products such as gasoline and diesel. An administration-proposed constitutional change that would limit private-sector participation in the electricity market would give the government leeway to burn even more fuel oil.

The government has argued that long-term auctions started in past administrations to increase renewable power purchases have weakened state power company CFE by forcing it to buy more expensive power, and fuel oil would be a cheaper solution. Three of Mexico's six refineries lack cokers to help turn fuel oil into more valuable products.

But a study by the US-based Institute of the Americas (IOA) found that fuel oil was the second-most expensive generating fuel in Mexico after diesel, based on the energy ministry's (Sener) own price at the end of June.

The variable cost of generation in Mexico for fuel oil burned in a steam generator was $127/MWh, and $116/MWh in an internal combustion generator — at least twice the cost of power from the auctions. Those costs averaged $20.60/MWh, $33.50/MWh and $47.80/MWh, competitive with generation from gas in a combined-cycle plant at $29.90/MWh and coal generation at $32.70/MWh.

"CFE saved really a lot of money if they were using the renewables instead of their own generation plants," study co-author and former chair of Mexico's energy regulatory commission (CRE) Francisco Salazar said.

In addition to the cost, the CFE is also burning fuel oil in some plants that were mostly designed for imported coal with low ash and sulphur content, such as some of the units at the 2.8GW Petacalco plant. CFE has stopped importing some coal because of this, and a 680MW unit that cannot operate on fuel oil has been left off line. This costs Mexico an estimated $800mn/yr, according to the IOA study.

And while six of Petacalco's units have been adapted to run on fuel oil, "the heat recovery systems were not designed to operate long-term with high-sulphur content fuel oil, such as that produced in Mexico" the study found.

The type of HSFO burned in Mexico is also particularly contaminating, with particulate and SO2 emission higher than that even of coal.

"A fuel that can no longer be burned in the middle of the ocean is now being used to fuel power plants located near highly populated locations," said co-author Francisco Barnes, a former CRE commissioner and deputy energy secretary.

Passing the proposal electricity bill and further increasing HSFO use in generators — or even keeping it at its current level — would weaken the CFE rather than strengthen it.

"Higher costs would require subsidies," Salazar said. ""CFE itself will be hurt. Increasing the rates will hurt politically and not be sustainable."

It will also keep Mexico on track to miss its clean energy goals, a topic on the agenda today at a meeting between the presidents of the US and Mexico as well as Canada.

"The US and Canada are taking the lead again on clean energy," Barnes said. "Mexico will be out of pace with the efforts of its two major partners."

By Carla Bass