Energy Reforms Open New Opportunities for Investors: Cuatrecasas

Q: How does Cuatrecasas assess Mexico’s energy policy changes from 2008 to 2024, and what do they mean for private investment?

A: The energy and infrastructure sectors in any country depend heavily on public policies and on legal and regulatory certainty. Legal certainty is the soul of commerce. For a law to be just, it must be clear, stable, and known to the entire population. And there are three ingredients that must accompany every investment. The first is legal certainty and security, the second is political stability, and the third is regulatory stability. Now, in 2024, when President Claudia Sheinbaum took office, a series of constitutional reforms were enacted, including the energy reform of Oct. 31, 2024, and the organic simplification of Dec. 20, 2024. With these reforms, the constitutional framework is now aligned with legislation, based on state leadership complemented by private initiative, but offering legal and regulatory certainty to private companies. Cuatrecasas has observed that in the energy sector, this element can be of added value to companies. What we have done to understand the new rules and the current legal framework in this sector, is essentially identify the opportunities that the new constitutional and legal framework provides in hydrocarbons and energy so we can deliver the best legal advice to companies. The challenge will be to find the opportunities which are aligned to this new legal framework and the current policies in this sector.

Q: What are the key changes introduced in the hydrocarbons sector under the new legal framework?

A: At first, the constitution was not reformed in that area, except that PEMEX, instead of being a productive enterprise, became a state public company, although it retains its level of operative autonomy. However, the new aim of PEMEX is to guarantee the national energy security and the sovereign of our country. In terms of the new hydrocarbons legislation, which is the Hydrocarbons Sector Law, it provides additional mechanisms beyond those already established in the Hydrocarbons Law. It respects the oil contracts as an exception in the future, while the rule is the assignments to PEMEX allowing mixed contracts. Today, there is a portfolio of 21 mixed contracts, with 10 of them currently under evaluation and in the contracting process. Through these, PEMEX aims to increase production by 69Mb/d of oil and more than 600Mcf/d of natural gas.

Q: How does the new constitutional framework reshape the balance between state control and private participation in Mexico’s electricity sector?

A: In electricity, some principles were adjusted in the sixth paragraph of Art. 27 of the Constitution, where the strategic activities are defined as the control and planning of the electric system, which is carried out by CENACE, and the transmission and distribution of electricity, which remain under CFE. But it says that in all other activities, private parties may participate. It only adds a clause stating that private parties shall not prevail over the state-owned public company, whose essence is to fulfill its social responsibility and to guarantee the continuity and accessibility of the national electric system. What does this mean? From a constitutional perspective, the state will have precedence over private investment. This initially caused concern among investors as the term “precedence” can be subjective. 

How far does that precedence go? This was defined in the Electricity Sector Law of March 18 of this year, which states in the planning activities of the electricity sector, that precedence will be 54%of electricity dispatch during a 12-month weighted average. In this way, precedence is in the planning chapter, and therefore it is established that in the electric sector development plan this 54% goal will be sought. However, the same law respects the principle of economic dispatch of load. This means that the load feeding into the electricity system will be based on variable production costs, with the only condition that reliability and continuity obligations are met. These obligations, which are the responsibility of the state and CENACE, will apply in cases where, for example, intermittent energy requires support to avoid interruptions in the continuity of the national electric system. This point will be regulated by the regulation of the Electricity Sector Law which will be launched in the short term by the government.

In order to fulfill the prevalence of the Mexican state in the electricity sector, the Electricity Sector Law states that the private investments and projects must be incorporated into the binding planning activities of the sector, particularly, into the Development Electricity Plan of the Electricity Sector.

Q: What kinds of new business opportunities are emerging for private investors under the Electricity Sector Law?

A: We conclude that the law creates participation opportunities for private investors that may not have been as open under the previous Electricity Industry Law, which had focused on the wholesale electricity market. If we read the constitution and the new legal framework properly, there are new areas and business opportunities both in hydrocarbons and in electricity. The Electricity Sector Law establishes that there can be self-supply generation, which is distributed generation, where no permit is required to generate your own energy. The threshold was raised from 0.5 to 0.7MW, expanding capacity. In self-consumption, it allows the possibility of isolated self-consumption, where I can generate my own electricity, and it allows the creation of private networks or interconnected self-consumption, where I generate my own energy but can share it with CFE. The only requirement is having CFE backup or storage systems. 

For third-party energy supply, there are two options: with the state or without the state. With the state, new mechanisms are created, such as the long-term electricity production contract, which means that a private party contracts with CFE to generate electricity, selling all the energy to CFE, with assets reverting to CFE free of charge at the end of 15–20 years. This strengthens CFE’s generation capacity but with private investment participation. These type of

contracts are subject to the National Electricity Development Plan. The second modality is mixed, where CFE holds at least 54 percent of the investment and the remaining 46 percent is private. Here, the challenge is reviewing financial models, contract structures, integration mechanisms, and ways for private investors to recover their investment and payments from CFE in the mixed scheme and from PEMEX in the mixed oil contracts.

Q: What are the main regulatory challenges that need to be resolved under Mexico’s new hydrocarbons and electricity laws?

A: What is missing and what challenges remain? Many of the powers left in both the Hydrocarbons Sector Law and the Electricity Sector Law are still very broad and general, which requires greater precision in regulations. For example, the scope of the principle of precedence and of binding planning: will precedence apply strictly in dispatch, meaning CENACE could at any time remove privately generated energy if it does not meet 54%? Or does the 54% only refer to a goal in the plan that will be updated over time, with corrective measures if it is not achieved? We believe it is the latter, not the former, but this will only be clarified in the regulations of the Electricity Sector Law, the Hydrocarbons Sector Law, and the Energy Transition Law.

Q: How will the principle of energy justice be applied in practice within Mexico’s regulatory framework?

A: Today, public policy in the sector promotes not only generating electricity but also advancing the concept of energy justice, which is more or less about overcoming energy poverty and social and gender inequalities in the use of energy and infrastructure. The aim is to promote shared prosperity and regional development through the adequate use of energy and infrastructure, affordable and timely prices, and ensuring that infrastructure meets basic needs while reducing social and environmental impacts. However, this concept now must be translated into daily practice through regulations. For example, how will this ingredient of energy justice be applied in generation or commercialization projects and permits? These are points still pending, and according to the transitional articles of the law, regulations must be issued within 180 days, by the second half of September. We believe that once these regulations are in place, there will be much greater legal and regulatory clarity, providing the certainty that companies in the energy sector need to make investments. As we know, these regulations will be enacted in the next weeks by the President Claudia Sheinbaum.

Q: What role will regulatory clarity and the new CNE play in attracting private investment?

A: The recently presented economic policy criteria speak of an allocation, including debt, of around MX$797 billion to PEMEX and close to MX$240 billion to CFE. But this will not be enough to meet either the oil & gas production goals or the electricity generation required. For this reason, through the new mechanisms established in law, private investment can play an important role. But this requires understanding a change in vision in public policy: the current government’s view is of a state-led model complemented by private participation. What associations and companies in general are asking for is that within the space allocated to private players, there be clear rules in regulation to achieve the regulatory stability that long-term investments require. Therefore, with the issuance of the new regulations, we believe there could be progress, and after the regulations, new administrative provisions will be issued by the new regulators. The great advantage of CNE is being a regulator with technical autonomy in decision-making. But from the companies’ point of view, the fact that under binding planning, which is clearly based on the public policy set by the Ministry of Energy, the regulator is integrated within the Ministry itself. As long as technical autonomy is respected as the law requires, this could be a more agile system than having the regulator as a separate entity. The model has changed, and these adjustments are becoming consistent with this new energy sector model. The challenge of this new model will be the execution of the policies and the planning activities in this sector.

Q: How will the new legal and regulatory certainty influence the viability of project finance in Mexico’s energy sector?

A: I would distinguish project finance in projects with the state and in independent projects. In projects with the state, the major challenge is how to finance a project where, together with PEMEX, particularly given its difficult financial situation, or with CFE, the private party ensures return on investment and income from the contract or profits in a mixed scheme. We believe there are legal mechanisms that can allow this. We have discussed with some players, and it is being explored, for example through mixed contracts, the possibility of trusts as mechanisms that self-contain contract income so that both the private party and the public entity receive their payments directly. This is a very transparent mechanism that also makes banks in Mexico more comfortable in terms of financial recovery. In electricity projects, or in hydrocarbons transportation and distribution, the banks and investment funds will evaluate a project over time, provide financing, and repayment comes from project revenues. The foundation is stability in returns over time. 

The current risk for banks in energy is: how can I guarantee income returns if there may be changes in public policy, in reputation, and in permits? The collision between the constitutional and legal frameworks has ended; now constitutional and legislative provisions are aligned. This means the rules are clear. Second, once regulations are issued, if a company integrates its projects within binding planning, then permits and compliance should present lower risk, which will define whether a loan surcharge is applied or whether financing is feasible. So once again it depends on legal and regulatory certainty, on how the regulations, administrative provisions and guidelines from the CNE and the Ministry of Energy are designed to make projects viable outside of the state framework and to reduce risk surcharges. 

In conclusion, compared to the past, the current status is better, though there is still progress to be made in legal, regulatory, and administrative clarity regarding permits and access, for example, to the national transmission and distribution grid. In the next weeks and months, we can see if the government satisfy all of these requirements to the investment and private projects in the energy sector.

Q: How does Cuatrecasas view Mexico’s energy outlook over the next decade, and what role can the firm play in supporting investors?

A: We see a model of state leadership, with greater participation from PEMEX and CFE, but with a difference from the last years: in the areas involving private parties, there will be greater legal and regulatory certainty. The state’s economic need to meet growing demand for hydrocarbons and electricity forces private participation, which is why the sector will grow step by step. Just as in the 2014 reform, this new reform will bring a series of decisions, some right and others less so, that will have to be addressed. The aim of the new energy reform is to provide energy security to our country, to face energy justice and to plan the activities, investments and projects in the sector as a complement of the state owned public companies, PEMEX and CFE, to guarantee the Shared Prosperity of the population.

For companies investing in the sector, what we always recommend is to understand this new state vision, and based on it, secure good legal advice before and during execution to avoid legal and regulatory risks. What do I mean by this? Before entering a project, conduct a legal, regulatory, and compliance analysis of the risks and how to mitigate them. Once the decision is made, companies must be accompanied through project assignment and execution. This is very important, since this administration is also being very strict in inspection and compliance oversight. We tell companies to be not only preventive but predictive, to have a compliance matrix and ensure that legal and regulatory matters support them in avoiding and mitigating these risks. 

We believe our added value is that we know the sector because we have worked very closely with it for many years. We know how far public policy can go, and how, from a strictly legal and regulatory perspective, companies can avoid risks, generate savings, and gain confidence in their investment. 

Mexico is a country full of opportunities to invest in electricity, in renewable energy projects such as solar and wind, and in other clean energies provided for in the law, as well as in hydrocarbons, where we will also see new mechanisms in the coming months and years that had not existed before. As an international firm, we also have the advantage of offering not only local and regional expertise in Latin America but also a global perspective. We are organized functionally, and in infrastructure, where I have the privilege of being one of the global coordinators, we work as a single firm. This gives us impressive legal and regulatory strength, since we know the practices of different countries and continents, which can add great value to companies and to Mexico’s energy sector. 

Q: What role will arbitration and ADR mechanisms play in giving companies greater confidence under Mexico’s new judicial framework?

A: With the recent judicial reforms, we believe it is important to ensure that contracts between private parties, or between private parties and the state, increasingly seek alternative dispute resolution mechanisms, the so-called ADRs, to avoid disputes during contract execution as much as possible. And if disputes do arise, there should be alternative ways of resolving them so that companies feel comfortable. On the other hand, regarding the reform of the judiciary, regardless of any value judgments about it, any changes in the judicial system will require a period of adjustment. At least in the first two or three years, we will need to observe and assess how the Mexican judicial system evolves. But in large-scale projects such as energy and infrastructure, you cannot afford to put investment at risk. Because what good is legal certainty if, when you need to enforce it, you do not find opportunity, precision, and balance in resolutions?

Cuatrecasas is an international law firm with a focus on Spain, Portugal, and Latin America, with presence in Chile, Colombia, Mexico, and Peru. With a multidisciplinary and diverse team of more than 1,900 professionals of 29 nationalities, it covers all disciplines of business law, applying knowledge and experience from a sectoral and business-focused perspective. It has 25 offices in 12 countries and also maintains close collaboration with leading firms in other jurisdictions.