/
News Article

The Case for a Constitutional Energy Reform

By Cinthya Alaniz Salazar | Wed, 03/09/2022 - 13:58

The institutional framework drafted in the 2014 Energy Reform has put state utility CFE at a competitive disadvantage compared to private energy producers and failed to reach its intended objectives, said Mario Morales Vielmas, General Director of Intermediation and Legacy Contracts, CFE. According to Morales, it is now crucial to step in and avoid the institutional entrenchment of a framework that does not serve the people of Mexico. Charged with the responsibility of providing and safeguarding a public good, the state should play an active role in the energy market.

“Energy generation is not a commodity in the way that private energy producers treat it. Today, we can see the negative results of this perspective,” said Morales. Prior to the nationalization of the energy market in 1960, private energy producers had only brought the grid to about 45 percent of Mexico’s inhabitants. These power producers where mainly concentrated in urban and industrial centers where they could profit from a concentrated market demand. Therefore, companies left the country’s rural fringes untouched. Following the sector’s nationalization, it would not be until 1996 that private players were allowed to participate in the market again. From that point forward, CFE would play a primary role in providing grid access to 94.7 percent of the population up to the year 2000. Even if it is at times considered to be inefficient, the state company has been key to providing access to electricity as a public good.

After achieving near-total coverage, the public focus shifted toward developing renewable energy resources in the face of climate change’s ramifications. To propel the country toward its objectives in a timely manner, state leaders had to reconcile the use of legacy infrastructure built by CFE over decades while harnessing the efficiency of the private sector. The resolution to this challenge was the 2014 Energy Reform, a sound first attempt at addressing the inefficiencies of the utility. However, the reform’s “deliberate fragmentation” handicapped the company, said Morales. “As a result of the 2014 Energy Reform, CFE was fragmented into subsidiaries, which reduced its ability to compete economically,” he added.

After realizing that the Energy Reform failed to engender the changes necessary to meet policy objectives, the current government opted to refine it. The revised Electricity Industry Law (LIE) proposal sought to meet shortfalls regarding grid reliability, distribute clean energy certificates (CELs) fairer, to actualize the cost of transmission, fix issues regarding the pre-2014 reform’s legacy market and include COVID-19 containment measures. The finalized proposal, introduced in March 2021, was met with overwhelming resistance by the private sector: a total of 4,250 amparos suspended the measure only day after it was published.

“The government attempted to make minor changes to regulation before resorting to promoting a constitutional reform. However, these previous attempts were stopped by private sector lawsuits,” said Morales.

Private power producers have not been afraid to flex their newfound legal protection, but their production capacity remains significantly lower than CFE’s. Private companies currently generate 30 percent of Mexico’s total consumption, CFE produces the remaining 70 percent. Moreover, the self-supply legacy market meets 15 percent of the country’s energy demand, working through what CFE calls a “black market” rife with illegal partnerships and unpaid wheeling charges.

Overall, the rise of new power producers obligated CFE to purchase energy via auctions. However, Morales underlined the proposed changes the energy reform failed to produce as the most important. The reform did not manage to reduce electricity costs, guarantee the supply of energy to all people, create an organized energy transition or prevent fiscal malpractices. Considering these failures, the federal government now wants to control 54 percent of all energy generation. President López Obrador does aim to respect the private capacity already in place, but new expansions should be made solely by the state utility.

“The State must regulate the sector to prevent that the electricity market’s power is handed to a few private groups," said Morales, who pointed toward the issue of Spain. In the Spanish electricity market, prices have surged because a small group of power producers decided to control their output to manipulate prices in their favor. For this reason, Morales argues that the state needs to oversee the market. "The Spanish government wishes it could do what the Mexican government does now,” he concluded.

Cinthya Alaniz Salazar Cinthya Alaniz Salazar Journalist & Industry Analyst