Chinese investors’ adaptation under Mexican Energy Industry Law

By Wang Jihong and Zhao Huiqi, Zhong Lun Law Firm

Mexico published an amendment to the Energy Industry Law (EIL) on 9 March 2021 to reinforce the dominance of Mexican state-owned companies in the domestic energy market, which increased the uncertainty for foreign and private-owned companies to invest in the renewable energy sector and worsened the policy environment. The new amendment runs counter to Mexico’s energy market reform that began in late 2013, to end the state-owned monopoly and open the sector to foreign and private companies.

王霁虹, Wang Jihong, Partner, Zhonglun Law Firm
Wang Jihong
Zhong Lun Law Firm

Failed preceding policy

In May 2020, the Mexican Ministry of Energy issued the Policy on Reliability, Safety, Continuity and Quality of the National Electric System, stipulating the instructions for federal, state and local authorities, state-owned companies and independent regulators (including the Energy Regulatory Commission, the CRE and state energy control centre, CENACE) to follow, creating barriers to renewable energy licensing and grid connection, giving special preferential treatment to state-owned companies and limiting market participation of specific generators through power dispatch policies. On 3 February 2021, the Mexican Supreme Court issued a decision, holding that many provisions in the policy are unconstitutional.

Key elements of amendment

Almost simultaneously with the Supreme Court’s decision, the Mexican government showed its determination to counter the opening of the electricity market. Mexican President Andrés Manuel López Obrador submitted the amendment of the EIL to the House of Representatives on 1 February 2021. The amendment was officially enacted into law on 9 March 2021 and its core elements include:

1. Adjust national grid dispatch and access rules, abandon economic dispatch mechanism, give preferential treatment to the Mexican Federal Electricity Commission (CFE). Lopez Obrador proposed the following dispatch priority order in a preceding legislative memo: hydropower – CFE’s power plants – private wind and photovoltaic power plants and other types of power generation facilities. Although the above order does not appear in an official amendment, it gives priority to the dispatch of all CFE’s power plants. And the industry commonly believes that the dispatch order in the legislative memo will be subsequently reflected in the specific administrative documents. For privately invested renewable energy, the future electricity dispatch will be subject to the broad discretion of the CENACE and the Ministry of Energy, and thus investors will face unpredictable constraints that will be fatal to their economic performance.

2. Require the CRE to revoke non-compliant self-supply power generation permits. The Ministry of Energy and many federal authorities publicly stated that the self-supply power generation permits are being abused. Third-party customers are making use of a legal gap to become partners or affiliates of some projects, to enjoy the electricity from self-supply electricity plants, which is completely contrary to the legislative intent of the self-supply model, even resulting in an unregulated parallel electricity market and shapes a systematic pattern of violations. The amendment requires the CRE to assess the conduct of the relevant self-supply generator under the permits to confirm whether it is abusing the model and, if so, to revoke its generation licence.

3. Review the legality and effectiveness of power purchase agreements between the CFE and private generators for the Mexican government and expand the authority of the relevant regulator to renegotiate power purchase agreements with private generators. According to the amendment, relevant regulators will review the effectiveness of power purchase agreements with private power producers to the Mexican government. In addition, the amendment also gives the CFE and CRE the power to renegotiate these power purchase agreements based on their assessment, which will result in the risk of invalid agreements and rights not being guaranteed to relevant private entities.

Besides, the amendment clarifies the issuance of Clean Energy Certificates is not subject to the type of ownership of the power plant and whether it is in commercial operation, and also removes the obligation for the CFE to go through a public bidding process when purchasing power from third parties.

The amendment requires the Ministry of Energy and relevant authorities to revise relevant rules within 180 days of the amendment’s enactment, to make sure these rules do not conflict with the amendment. Thus, private investors will also face the uncertainty of subsequent administrative rules.

赵蕙骐, Zhao Huiqi, Associate, Zhong Lun law firm
Zhao Huiqi
Zhong Lun law firm

Risks and measures

Like many foreign investors, many of the renewable energy schemes involving Chinese investors are self-supply projects mentioned by the amendment. If the amendment comes into effect, these projects will face fatal risks, including the revocation of a power generation licence, the lack of access to the grid and the invalidity of the power purchase agreement etc. As a result, Chinese investors involved in this type of renewable energy will likely face the risk of a complete loss of the project’s economic benefits.

As far as we know, a number of private power producers in Mexico have begun judicial proceedings against the amendment. On 11 and 16 March 2021, the Mexican District Court issued a stay order, temporarily suspending the effectiveness of the above amendment, but the Court of Appeals is further reviewing the stay order.

To Chinese investors, in addition to the local judicial remedies in Mexico, they can also protect their investment rights and interests through the remedy of international investment dispute arbitration. China and Mexico signed the Agreement between the Government of the United Mexican States and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments in 2008, which already came into effect in 2009. According to this agreement, each party is obliged to protect the investments of the other party’s investors in its own country. Considering the potential impact of the amendment once implemented, the authors think that investors’ rights will have a good chance of being upheld in international investment arbitration.

Wang Jihong is a partner and Zhao Huiqi is an associate at Zhong Lun Law Firm

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