Mexico ‒ a vanishing independent electricity market?

By Wang Jihong and Zhao Huiqi, Zhong Lun Law Firm

In a bid to comprehensively reform Mexico’s energy and mining sectors, President Andrés Manuel López Obrador, in his capacity as head of the executive branch of the government, has submitted to the Mexican Chamber of Deputies (Cámara de Diputados) a bill to amend the Mexican constitution.

The bill, submitted on 30 September 2021, proposes measures such as abolishing Mexico’s independent electricity regulator and limiting the share of electricity generated by private energy companies in the country’s electricity market.

It is generally believed in the energy industry that the bill, if passed by Congress, will shake up Mexico’s energy sector like an “earthquake”.

This article introduces the main aspects of the proposed constitutional reform and its potential impact on the market.

Opening-up and costs

Since the 1990s, Mexico’s legal framework for energy has allowed limited private participation in the electricity sector through mechanisms such as “autoabastecimiento”, which means self-supply generation.

Wang Jihong, Zhong Lun Law Firm, Mexico ‒ a vanishing independent electricity market?
Wang Jihong
Zhong Lun Law Firm

The country launched a constitutional reform in respect of energy in 2013 to further open up its electricity sector. Following reform, the Mexican energy market experienced remarkable growth between 2014 and 2018 by involving private and foreign investors throughout the energy value chain.

Due to various factors, however, the energy reform did not achieve its expected goals.

In 2018, Mexico experienced major political upheaval as government power changed hands. The newly elected ruling party, Movimiento Regeneración Nacional (MORENA), believes that the 2013 energy reform only benefits private enterprises and foreign investors – and brings no benefits to the Mexican state or its people. Since coming to power, MORENA has been intent on adjusting the energy regulatory authority and relevant legislation to undo the 2013 energy reform.

Purpose and impact

The bill mainly intends to amend articles 25, 27 and 28 of the Mexican constitution. Its main purpose is regain Mexican government control over the national electricity system (Sistema Eléctrico Nacional) through the Federal Electricity Commission (Comisión Federal de Electricidad, or CFE). If passed, the bill will reverse privatisation of the electricity sector.

Specifically, if the bill is approved without modification and in effect becomes a constitutional amendment, it will have far-reaching impact on the Mexican electricity industry as from the effective amendment date (when the amendment is published on the Federal Official Gazette):

(1) The Mexican government will regain control over the national electricity system;

(2) The CFE will be established as an entity with a monopoly over the purchase and sale of electricity. It will have full control over the electricity market by formulating dispatching rules and determining the planning, control and management of the national electricity system without being influenced by autonomous regulatory bodies such as the Energy Regulatory Commission (Comisión Reguladora de Energía, or CRE);

(3) The former independent operator of the electricity market, the National Energy Control Centre (Centro Nacional de Control de Energía), will be merged into the CFE, and the existing electricity generation licence, and all power purchase and sale agreements between private parties, will be revoked;

(4) The CFE will guarantee the generation of at least 54% of electricity required by the country and the private sector will participate in up to 46% of the power supply;

(5) The CRE, the autonomous energy regulator, will be abolished and Mexico’s Department of Energy (Secretaryía de Energía) will take over relevant functions of the agency.

Zhao-Huiqi,-Zhonglun-law-firm, Mexico, a vanishing free electricity market?
Zhao Huiqi
Zhong Lun Law Firm

This means that Mexico’s currently existing free, independent electricity market will cease to exist. The bill will return Mexico to an electricity regulatory system similar to that seen before the 2013 energy reform – and even give the CFE more functions and stronger control over all activities in the electricity industry, including power generation, transmission, distribution and supply. Therefore, foreign investors are expecting to face great uncertainty in electricity investment in Mexico.

At the constitutional level, some Mexican lawyers hold that while the constitutional amendment gives the CFE regulatory functions, it also establishes its monopoly in the power purchase and sale system.

Dilemma of foreign investors

Although the bill is still in an early stage of proposal, experts and scholars generally believe it is vague in content and impractical, leaving much autonomy to future enforcement agencies.

This means the ruling party must make necessary modifications, additions and adjustments to the bill to have it passed. In addition, due to the ruling party’s insufficient seats in parliament, there is uncertainty as to whether the bill will be ultimately passed by the legislature anyway.

In mid-January 2022, Mexico’s Chamber of Deputies commenced a public discussion on the bill, during which the head of the CFE provided clarification on ambiguous content, such as: how to deal with autoabastecimiento projects; how to revoke the existing electricity purchase agreement; and whether the government will control the electricity industry immediately after the amendment is passed.

Notably, the head of the CFE made it clear that the main purpose of the constitutional reform was to prevent Mexico’s electricity industry from being controlled by foreign companies, especially international investment funds. He said that the largest four foreign companies in Mexico were all backed by international investment funds, and the identities behind these funds were unknown, posing a threat to Mexico’s national policy and security.

Therefore, no matter whether the constitutional reform is passed, foreign investors should not ignore the reasons, trends and purpose behind it. The current Mexican government intends to conduct strict scrutiny and control over foreign investors in the field of electric power investment.

It will come as a challenge to a fully open Mexican electricity market envisaged by the 2013 electricity reform, and also bring great uncertainty to investors’ investment expectations. Prospective investors in Mexico’s power projects should therefore closely follow relevant legislation and reform trends, and take appropriate measures in a timely manner.

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

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