Government Moves Against Private Producers
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Government Moves Against Private Producers

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Wed, 04/13/2022 - 14:35

Mexico’s federal government is making a move against private power production contracts. Following the ruling of the Supreme Court of Justice (SCJN) that reactivated the Electric Industry Law (LIE) of 2021, the president’s office announced that it will review electricity self-supply contracts and permits that do not comply with the reformed legal framework. If necessary, it will proceed to revoke them.

"Self-supply permits containing serious irregularities and fraud to the law will be reviewed and revoked. There are 234 self-supply schemes, of which 110 are illegal and have 77,000 member-customers," informed the presidency through a press release. In reality, the ambiguously named self-supply scheme involves legacy contracts from before the 214 Energy Reform and have been a key focus of the current government’s desire to reform the energy sector.

Among the companies under review are Iberdrola, Naturgy, Mitsui, Saavi and Enel. These companies developed 34 power plants with an installed capacity of 16,51MW, 28 of which are combined cycles and six are wind power plants, which have been selling part of the electricity to CFE since 1992.

Likewise, the government announced a review regarding the profitability of these contracts for state utility CFE. The purpose is either to renegotiate them or proceed with their early cancellation.

"The legality and the state’s financial profitability regarding independent production contracts will be reviewed. When applicable, contracts must be either renegotiated or terminated early. CFE pays 100 percent of the generation of these independent production plants, even if [electricity] is not delivered," the statement explains.

In addition, CFE will be able to negotiate electricity coverage contracts with delivery commitments. Therefore, it will be able to dispatch its own power plants through a fixed generation program.

With these changes, hydroelectric plants will have a priority in grid operator CENACE’s electricity dispatch. Mexico has 60 hydroelectric plants that generate 12,125MW, around 10 percent of the energy in the system. Before López Obrador's administration, hydroelectric plants were only used to generate backup power and did not represent more than 3 percent of the market. To counteract this situation and strengthen CFE’s position in the market, the López Obrador administration is modernizing and building 16 hydroelectric plants, which will increase their share to 18 percent of the national electricity system.

Furthermore, CFE Basic Supply will be able to sign contracts with power plants owned by the state utility that are committed to physical delivery. From now on, access to electric grids will only be possible when power plants can prove their dispatch is technically feasible.

With these actions, the government furthers its strategy to strengthen the CFE at the expense of the private sector. "As of today, private producers maintained their monopoly through preferential dispatch. With this resolution, CENACE will prioritize what benefits CFE," concluded the presidency.

Industry analysts consider that the Supreme Court’s decision regarding LIE has left the country in an unfavorable situation of uncertainty regarding financial, investment attraction and improvement of the electric transmission network. Paolo Salerno, Founding Partner, Salerno y Asociados, believes that the energy sector will come to be divided into two: the sector that has amparos to operate and the one that did not seek amparos and therefore functions under the LIE. "We are in a worst-case scenario, with the future view of paralyzing any positive progress in the electricity sector until the end of the six-year term," said Salerno.

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