On January 29, 2021, the President of Mexico, Andrés Manuel López Obrador, sent the Chamber of Deputies (Congress) an initiative to reform the Law for the Electricity Industry (the “Reform”). The Reform was presented to the Union Congress as a “preferrence”, so the Union Congress had a maximum period of 31 calendar days to process their respective opinion. Once approved by the Chamber of Deputies, the Reform was presented to the Senate for review and formalizing, taking another period of 31 calendar days. Finally, on March 2, 2021, the Mexican Senate approved the Electric Industry Law Reform, with 68 votes in favor and 58 against.
The amendments were originally proposed in a Memorandum issued by the President on July 22, 2020, which contained guidelines governing The New Energy Policy of México, like the various regulatory modifications presented in recent months.
According to the Explanation of reasons for the Reform, it seeks to favor the Federal Electricity Commission (CFE) and modify of the mechanism for power plants sending energy to the grid.
These are some of the main points of the Reform which would have great impact on participants of Mexico’s Energy Industry:
- The Reform aims to end the power dispatch mechanism of the power plants that today operate independently of the National Energy Control Center (CENACE), to give priority to CFE plants—defining which plants inject their energy into the grid and at what point. The Reform eliminates the obligation to send the most economical energy first and, in the process, gives priority to CFE generating plants. Firstly, to hydroelectric plants; secondly, to the other CFE plants; subsequently to the wind and solar energy of individuals; and, finally, to the combined cycle plants (plants operating from a gas and a steam cycle) of individuals.
As hydroelectric plants cannot meet the country’s electricity demand, the main beneficiaries would be CFE’s most polluting plants, which generate electricity from fuel oil and coal, and have higher costs than the rest—which would have negative economic and environmental implications at the local and global levels.
The main losers of this Reform are renewable and clean energy plants.
- To date, the CFE has been obliged to buy electricity through auctions, to ensure the cheapest price. The Reform is intended to eliminate that obligation. With changes to the law, you could opt for electricity from any plant or source, according to priority level, and without auction, which can affect the purchasing power of end users.
- Clean Energy Certificates (CEL) will be awarded to any energy producer; regardless of whether their plants are new or old, or their date of entry into operation. Which would mean that there would no longer be incentives for new plants to be created—but, if one already existed, it would have the possibility of obtaining a certificate.
The option of investing in new plants will lose importance and incentive.
- The Reform gives the option to revoke permits issued to small generators under the previous laws, called self-suffestment or co-generation, which have functioned as an alternative to meet their own energy generation needs. Such permits may be revoked by a review from the Energy Regulatory Commission (CRE).
This puts companies operating under this scheme in a situation of legal uncertainty.
The Reform negatively impacts three guarantees: free competition, competitiveness in the electricity sector and a healthy and sustainable environment.
There are also disturbing implications for the private sector.
The priority given to the CFE among companies that send energy to the National Electricity System will adversely and directly affect companies which invested in the generation of clean energy through wind or solar farms—they will no longer receive incentives to continue to grow or bring investments.
As mentioned above, the Reformation has been approved by the Senate and, as of the day following its publication in the Official Journal of the Federation, the Ministry of Energy, the CRE and the National Center for Energy Control will have six months to make the necessary modifications to the regulatory instruments to align them with the provisions of the Reform.
The opposition political parties believe that the Reform includes provisions contrary to the spirit of the Political Constitution of the United Mexican States and applicable energy legislation. In addition, the Reform may imply a violation of various obligations adopted by Mexico through multiple International Treaties; highlighting agreements on economic, environmental and human rights matters.
The private members of the sector have means to oppose the Reform once in force; and foreign investors could also explore the possibility of the Reform breaking certain International Trade Agreements, and could denounce Mexico’s non-compliance with its respective international obligations.
The future of the new energy framework, even after its approval, is uncertain. Opposition parties intend to file a constitutional action with the Supreme Court.
The Federal Economic Competition Commission (an autonomous body that also has the power to appeal to the highest court) warns that the Reform violates the principle of free competition in the Mexico Constitution and recommended that Congress not approve it.
All this is ongoing, and we’ll do our best to keep you updated on the state of Mexico’s Energy Industry.
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