Mexico said it will begin construction of Cuxtel 1, a 16-kilometer, 36 inches diameter pipeline that will supply natural gas to the Yucatan Peninsula to produce electricity more cheaply.

Cuxtal I will initially provide CFE, the state utility, with 240 MMcf/d, but it is expected to ramp up supply to 500 MMcf/d to meet the demand of two combined-cycle power plants to be built in the coming years.

French utility Engie was awarded the $25 million project.

The Yucatan region, which includes the states of Campeche, Yucatan and Quintana Roo, generates its electricity at five plants with natural gas from Nuevo Pemex, a processing center in neighboring Tabasco owned by the State oil company. However, gas production has declined since 2010 forcing CFE, the State utility, to use fuel oil instead, increasing costs.

Platts Analytics data shows that the Peninsula region has received roughly half of it's electricity supply via a single electricity transmission line, increasing power price LMP congestion and loss charges.

With more gas supply allowing the Peninsula to generate more electricity locally, a reduction in transmission constraints may significantly lower power prices.

In the first phase, Cuxtal I will connect Sistrangas, the national system, with the Mayakan pipeline, a 780-kilometer pipeline also owned by Engie that takes gas from a Pemex processing center. Engie owns Mayakan in partnership with GE Capital and EXI CKD, a specialist energy investment fund.

In the second phase, the plan is to further extend the pipeline another 158 kilometers to take gas to the Cancun area.