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News Article

Energy Reforms May Slow Down Chinese Investments

By Rodrigo Brugada | Fri, 05/07/2021 - 19:12

Public-private collaborations in the energy sector have been frail since President Andrés Manuel Lopez Obrador came into office. Now, recent regulatory changes are causing significant uncertainty for private investors, particularly foreign ones.

 

Mexico’s energy sector waits for the country’s midterm election results to find out what will happen to the industry. Earlier this year, President López Obrador gave Congress a proposal to modify the electricity industry law. These modifications would return unchallenged power to the Federal Electricity Commission (CFE), limit free competition and open access to the generation and commercialization of electricity, as reported by Jones Day. While this reform was approved earlier in May, a federal judge halted its implementation one day later to protect the right to free competition. Now, the president seeks to amend the constitution and reverse the suspension, as reported by Global Risk Insights.

 

Some crucial aspects of the proposed changes to the law are that they could pave the way to displace private power plants and renewables producers and enable CFE's older plants to get unwarranted Clean Energy Certificates, disincentivizing investment in green power. Moreover, the increased fossil fuel use will likely result in more illnesses and premature deaths owing to air pollution, as reported by Forbes.

 

 

These regulatory changes aim to promote Mexican energy sovereignty, but have brough significant uncertainty for the private sector, particularly foreign investors. These reforms may also spark substantial challenges for Mexico, which has signed multiple bilateral investment treaties and will probably face a surge in international lawsuits, as explored by Manuel Perez Rocha, an associate fellow of the Institute for Policy Studies. One potential lawsuit relates to the USMCA terms against state-owned enterprises receiving preferential treatment. The other has to do with Asian investments, mainly Chinese ones.

 

China has not had as big of a presence in Mexico as it does in other Latin American countries. This represents a significant opportunity for foreign investment, as was shown with the Chinese acquisition of Zuma, a large renewables companyChina's interest in Latin America could represent an increase in foreign investment for Mexico. Nonetheless, with these regulatory changes, things can go awry, and Chinese investors may protect their assets through the Agreement on the Promotion and Reciprocal Protection of Investments that is in place since 2009, as stated by China Business Law Journal. While this budding relationship with Asia is promising, things can also get complicated due to Mexico's proximity to the US, and will probably be affected in turn by China-US relationships, as explored by BNAmericas.

The data used in this article was sourced from:  
Jones Day, Global Risk Insights, Forbes, IIJ UNAM, Inequality.org, USMCA, Bloomberg, Natural Gas Intel, China Business Law Journal, BNAmericas
Photo by:   Anne Nygård, Unsplash
Rodrigo Brugada Rodrigo Brugada Journalist & Industry Analyst