France, Mexico and the Renewed Reform War

Mexico is not the only country pushing for energy sovereignty. As the run-off for the French presidential elections draws near, incumbent president Emmanuel Macron is set to back greater state control over the energy sector in a bid to overcome rival Marine Le Pen and her populist appeal. Though the countries exist in vastly different environments, parallels between their energy strategies can be drawn. 

According to sources cited by Bloomberg, President Macron is ready to table a plan to re-nationalize Electricité de France (EDF), Europe's second-largest power group, of which the French government already holds an 84 percent share. As France approaches the second round of presidential elections this Sunday, Macron is adopting a narrative of “taking back control” over certain businesses in the energy sector, with the policy goal to break dependence on imports and avoid skyrocketing gas and electricity prices. This marks a significant policy shift: just a year ago, Macron proposed to increase the privatization of EDF as part of the so-called Hercules plan. Such a backstep, therefore, suggests Macron is moving to garner support from left-wing Mélenchon voters in the second round of the presidential elections, a strategy that political analysts suggest Le Pen is eyeing too. 

Much like Mexico’s PEMEX and CFE, EDF arose from the nationalization of smaller energy companies around the 1940s. EDF, created by then President Charles De Gaulle, remained a state monopoly until the turn of the 21st century, when it was forced by the EU to open up 20 percent of its business to competitors. The company remained state-owned until the mid-2000s, when it was partly floated on the Paris Stock Exchange by the Chirac administration amid growing pressure from the EU. The previous Socialist Party administration, in which Macron served, promised to reverse privatization when it took power from the Republicans. Nevertheless, threats of punitive proceedings arising from the EU’s competition policy prevented then-President François Hollande from realizing such plans. 

Now, Russia’s invasion of Ukraine has plunged Europe into an energy crisis. While the US, Canada and the UK have halted imports of fossil fuels from Russia, countries like Germany are so reliant on Russian oil and gas that a boycott could sink the nation, and with it the entire Eurozone, into recession. Europe’s biggest economy imports over half of all its gas and third of its oil from Russia, while France only relies on Russian natural gas for a quarter of its gas supply, thanks to its heavy investment in EDF-owned nuclear power plants. Mexico, by comparison, is also heavily reliant on fossil fuels imported from the US, with which it generally enjoys a positive relationship, despite some recent political problems between the countries arising from AMLO’s planned energy reforms and whether they violate the USMCA treaty. 

In the aftermath of the 1973 oil crisis, EDF made the pivot to nuclear power, which now represents 75 percent of French electricity generation. France lacks the abundant natural resources that Mexico boasts, meaning it was once entirely dependent on fossil fuel imports. To paraphrase former president Sarkozy, the French may not posses coal, oil or gas, but their readiness to embrace nuclear innovation has endowed them with an independence many European neighbors now envy, as they are forced to rely on Putin instead. 

The big difference between France and Mexico is the type of energy they will rely on going forward, though both presidential candidates have announced their support for further investment in nuclear projects. Whereas France is a global leader in splitting the atom, Mexico currently has just two active nuclear reactors at Laguna Verde, which produce 4 percent of the country’s electricity. With much of the public sector’s investment already devoted to oil and gas, it is unlikely nuclear power will expand massively, although state utility CFE has expressed its interest in developing smaller, modular nuclear power facilities. 

In many ways, nuclear power is to France what oil is to Mexico: a catalyst for economic growth, a synonym for sovereignty and a source of national pride. Macron’s plans would reorganize the US$30 billion EDF with an even greater focus on nuclear energy. Proposals also include making the French prime minister responsible for green transition planning, as well as the creation of two new ministerial positions devoted to transitional energy programs. This strategy seeks to ally ecology and economy by betting on investment and innovation to replace fossil fuels with hydrogen, especially in transport. It also encourages the purchase of electric vehicles. Macron had previously come under fire for his perceived inaction to ward off climate change, as well as his failure to reduce carbon emissions made on the 2017 campaign trial. Macron hopes such renewable energy initiatives will prove popular among the younger generations. 

However, López Obrador’s overemphasis on oil-led finances at the expense of ecological concerns has seen him face heavy criticism from opposition parties, Indigenous communities and foreign NGOs alike. The president’s insistence on tried and tested methods to stimulate economic growth not only harm the environment but may also prove a costly gamble, especially regarding the already over-budget Dos Bocas oil refinery. The long-term plan is to make Mexico entirely self-sufficient, putting an end to fuel imports and crude oil exports. 

The analogous reforms of EDF and PEMEX underline their prime importance for the economies of both nations, as well as their political weight. In many ways, the success of a French or Mexican president is tied to that of EDF or PEMEX. Both administrations appear to see nationalization as a means of rescuing their debt-laden energy giants while containing inflation. Yet, critics of both López Obrador’s reforms and Macron’s plans argue that further state intervention only serves to discourage potential investors and lead to legal uncertainty for private companies operating in the domestic market, such as those currently being experienced in Mexico’s energy and oil and gas industries. 

López Obrador’s plan to rescue PEMEX and CFE follows a wider energy program. Earlier this week, the proposed constitutional electricity reform bill, which sought to strengthen CFE at the expense of private companies, was rejected by the Chamber of Deputies when it failed to garner the two-thirds of votes required to make a change to the Constitution. The president did score a victory on Tuesday, however, when his mining reform law was passed, granting the state exclusive control over lithium. Once again, López Obrador touted the reform as a guarantee of “the self-determination of the nation, as well as the energy sovereignty of the people over lithium and other minerals that are strategic and necessary for the energy transition.” However, it will likely be another decade before the exploration of lithium deposits ramps up and the technology and expertise are acquired to begin extracting and processing the resource. 

As the tide turns back toward state-ownership, the hope is that nationalization can buoy the heavily indebted energy giants on the road to recovery. In 2020, PEMEX lost its coveted investment-grade rating, largely due to years of declining crude production. It now occupies the undesirable position as the world’s most indebted oil company. To support the NOC, President López Obrador announced that his government would continue to pay off PEMEX’s debts until 2024, when the oil giant is expected to have recovered enough to sustain its own debt. Mexico's government made capital contributions to PEMEX of MX$202.56 billion (US$10 billion) for debt repayments and granted the firm MX$73.28 billion (US$3.6 billion) in tax incentives in 2021 alone. 

This year also saw EDF’s Long-Term Issuer Default Rating (IDR) downgraded from A- to ‘BBB+ by Fitch Ratings, while its Standalone Credit Profile (SCP) was revised down to BBB from BBB+, placing the company’s rating on Rating Watch Negative (RWN). This follows the promise of greater political intervention in EDF to offset tariffs and limit the increase of energy prices for households. Macron mandated that the French energy giant lowers its prices, which, accompanied by extended outages at some nuclear reactors due to safety concerns resulting from the ageing infrastructure, threatens to heavily erode EDF’s margins, at least for 2022.

A recurring criticism against nationalization in both Mexico and France is that the public sector is forced to assume the debt of the floundering energy giants until they get back on their feet. For his part, López Obrador has pledged to support PEMEX and CFE, as he hopes that by shedding Mexico’s dependence on foreign interest in the oil and gas sector, the NOC can finally be restored to its former glory. In the case of EDF, Macron intends to revive the national nuclear energy industry. Unlike PEMEX, however, as a multinational company, EDF’s scope is not limited to the domestic market: it also seeks to expand its operations in other countries, especially amid an energy security crisis in the post-Brexit UK.