What role does this department play on the company's overall business strategy?
We are committed to lowering the cost of energy for the whole company. We are one of the largest energy consumers in Mexico, as we use electricity as the main energy source for steel production. We are in charge of procuring power and gas to more than 24 facilities around the country, both for steel factories and other facilities as well. We also produce steel from recycled materials and are completely integrated. Deacero has had the power department for seven years, and we make sure the company has the electricity it needs. When I joined the company in 2019, I noticed there were many opportunities to go beyond by leveraging all the opportunities provided by the energy reform. Deacero has the power, scale, and balance sheet to become an important market participant in the Mexican electric wholesale market. After deciding to head in that direction, in September 2019 we signed a contract with the National Energy Control Center (CENACE) to become a formal market participant. So far, we are the only industrial company in Mexico to have taken that decision. The energy consumption of the company is large enough to justify the investment. We signed a bulk power agreement (BPA) with private companies in Mexico to make sure we have enough energy for our operations, and in May we will formally begin operations as a market participant, with a 165-MW BPA with CENACE.
How does this save costs for the company?
We are looking at two main things: cost and reliability of the service. The second one is provided by the Federal Electricity Commission (CFE) through its transmission infrastructure. With all these contracts we are entering into, we have secured energy that is 30% lower than what we have paid before. For steel companies such as Deacero, power represents 30% of its transformation costs in steel products, which can determine the profitability of production.
How much did the company invest in this transition to become a market participant?
The main investment is preparing the infrastructure, building up the system, and hiring the right people. It is significant, though the main investment comes when you have to execute the contract of around a 15-year commitment. We will be customers only at the beginning. We will partner with an international company to eventually build a combined cycle powered by natural gas infrastructure in Guanajuato. We will do that with Fisterra, an affiliate for Blackstone. We are in the process of acquiring the permits and expect to have the COD in January 2023. We are just investors for this project; we are not operators. We are keen to diversify our energy sources to be able to have alternatives if the event the grid fails at any point. We want to increase our renewable energy mix in our portfolio, but given the nature of our business, we cannot at this time rely only on renewable energy due to the continuity we need; however, we are starting to take steps in that direction. We are offtakers of a 110-MW solar plant in the north of Sonora for our consumption. We want to be sure we comply with all the regulations on renewables, and the more we can move to a higher use of renewables, the better, though we need to do it in a smart way.
What does the model need to motivate more companies to follow your example?
They need the information, because not everyone knows about it. This comes from the Electric Industry Law enacted in 2014. The companies wanted better alternatives without carrying any risks; however, we are now absolutely confident in the market and all the regulation around it. The second thing is to have the scale of consumption, and the third is to be committed to having all the tools needed to operate it.