Government Moves Against Self-Supply Contracts
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Government Moves Against Self-Supply Contracts

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Mon, 05/16/2022 - 13:47

The Mexican electricity sector continues to face uncertainty. Although Congress rejected the energy reform initiative in mid-April 2022, the debate has now shifted towards self-supply contracts, a pre-2014 Energy Reform contract modality that the federal government is seeking to eliminate.

The federal government announced it will begin its review of self-supply contracts and permits that do not comply with the legal framework described by the Electricity Industry Law (LIE) of 2021, which was recently reactivated by the Supreme Court. It is expected that around 110 self-supply permits, considered illegal by the López Obrador administration, will be revoked. There are currently 234 running contracts in the self-supply legacy scheme, which include around 77,000 members that receive the energy.

Since 1994, self-supply permits allowed 468 mostly private companies to generate electricity on their own, which meant they did not have to rely on CFE's supply other than for transmission and distribution. As such, self-suppliers focus on C&I clients and do not offer electricity to residential users. As of 2019, 430 private sector and 38 public sector permit holders invested around US$26.8 billion in power plants constructed under this modality. According to current legislation, the estimated end date of this scheme will be May 2039, as energy contracts and permits are often signed considering the long term.

CFE's argument regarding the illegality of the self-supply companies mainly involves the small porting fee these companies pay. Back in the day, these benefits were willingly granted as incentives to increase the competitiveness of clean energy generation, in addition to rewarding the high-capital investments made by the companies to strengthen CFE's transmission networks.

The government’s persecution of self-supply permits appears to be motivated by finances rather than legal provision. Since the privatization of the Mexican electricity market, CFE has lost some of its competitiveness since the utility’s power production comes at a rather high cost. Over time, CFE lost industrial and commercial customers who opted to migrate to different power suppliers. However, even if the legacy market were to disappear, CFE would face a major problem as it does not possess the capacity to meet the significant demand.

In 2020, 12 percent of Mexico’s electricity generation came from the self-supply scheme. President López Obrador has reiterated that he wishes to create a dialogue with the private sector to make a transition towards "legality" where no electricity user is affected. However, his government has not outlined clearly how it will be able to provide the missing electricity demand if these plants cease operation.

Revoking self-supply contracts before they expire would have counterproductive consequences for the Mexican economy. The Mexican Institute for Competitiveness (IMCO) says breaking up these currently valid contracts may mean that the rule of law and legal certainty in the country takes a hit by violating the conditions under which companies invested. This would in turn harm Mexico’s capacity to attract national and foreign investment.

The cancellation of self-supply schemes would also suddenly increase the production costs of the companies that consume electricity coming from the legacy market. Because a lot of this market’s power is either renewable or produced with cleaner-burning natural gas, Mexico’s climate goals could suffer as well.

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