Arturo Carranza
Energy Adviser and Consultant
Expert Contributor

Halfway Through the Presidential Term, What’s Next for Energy?

By Arturo Carranza | Mon, 07/12/2021 - 09:11

Mexico’s midterm elections on June 6 marked the end of the first half of President Andrés Manuel López Obrador’s six-year term. After 32 months that have been accompanied by a combative narrative that aims to distinguish the government in place from past administrations, the assessment in the energy sector is not striking.

Although the strategy to reestablish state control over the energy sector has been useful in strengthening Lopez Obrador’s relationship with the political bases that underpin his government, the actions taken within the framework of a new energy policy have not necessarily contributed to the proper functioning of this sector. On the contrary, it seems they have carried it toward a standstill.

Immersed in an antagonistic rationale, Mexico’s president and its energy officials propose and promote their relationship with other actors, particularly with private companies within the sector, as if it was a fight between good and evil. In a relationship based on these terms, the other actors can only be perceived as adversaries. Under this conception, what has happened during this first half of the president’s six-year term finds an explanation.

In this context, the first three years of the current government were underlined by the presidential attempt to modify the energy sector’s legal framework. Although other decisions have also been made, such as the cancelation of oil and electricity sector auctions, the greatest change relates to the intention to derail, by legal means, the energy model created in 2013.

First, López Obrador submitted a proposal to reform the Law of the Electric Industry, whose content established a new dispatch priority policy that favored power generation by Mexico’s Federal Electricity Commission (CFE). Then, the president submitted another reform proposal to the Hydrocarbons Law that established new measures to extend fuel storage capacity and limit the ability of private companies to import and export fuel.

Since the proposed changes were reforms to two secondary laws, and their approval only required an absolute majority (half the members of Congress plus one) in both chambers of Congress, the president and his legislative coalition had no problem getting them off the ground. Both cases confirmed the degree of the Executive Power’s influence over the country’s legislative body.

Once Congress approved these reforms, many private companies affected by these legislative changes sought constitutional protection before the Judiciary Power. As a consequence of these complaints, both reforms are held up in court, waiting for the Supreme Court to determine whether they are legal or not. So far, the odds are in favor of the complaining companies, at least in everything concerning the modifications to the Law of the Electric Industry.

Given that these reforms have upset the sector’s private companies, the president has justified these changes through two different arguments. The first, which has to do with the most basic elements of his narrative, is that they will allow him to carry out his promise that energy prices won’t increase much more than annual inflation. The second, which has to do with an abstract conception of power, considers that the presence of state-owned companies in the energy markets will allow the country to produce and distribute energy products in a more equal and fair manner.  

Beyond the arguments that seek to explain the way in which the country’s energy policy is being handled, it is clear that the government’s vision opposes the 2013 Energy Reform, which liberalized the energy markets and narrowed the reach of Petroleos Mexicanos (PEMEX) and CFE. While the sector remains immersed in this confrontation, in which a certain vision has yet to be fully established and another has yet to be fully suppressed, all investments and projects remain blocked.

For the second half of his six-year term, the president announced that he will persist in his attempt to reestablish state control over the energy sector. The efforts will be particularly focused on the electric industry.

According to what López Obrador has publicly stated, soon his government will present a constitutional reform to strengthen CFE. In line with his discourse, it is probable that the Executive will propose a reform to the texts of the Constitution Articles 25 and 28 for specifying that a stable operation of the grid must be above free competition and free participation.

If this possibility eventually materializes, the president will be able to carry out a new dispatch priority policy and strengthen CFE, allowing it to place on the grid most of the electricity it generates within its power plants. It is known, because it has been widely discussed, that this will ensure the secure and stable operation of the grid, while the environmental and energy generating costs would increase in Mexico. 

The odds that Mexico’s Congress approves a constitutional reform in the aforementioned terms are low. The results of the midterm elections didn’t give López Obrador, or his electoral coalition, enough votes to count on a majority that would allow him to implement these modifications before Congress. As a result, he would have to count on the support of a two-thirds majority in the Chamber of Deputies as well as in the Senate. Currently, his legislative coalition only has the support of over a little more than half of both chambers.

The current composition of Congress, however, is not a definitive obstacle. It suffices to point out that during the past three years, even when López Obrador did not rely on a two-thirds majority, he was able to gain the necessary consensus to reform the Constitution in relation to very important topics of his political agenda, such as social welfare for vulnerable groups. In any case, the most relevant question is not whether a constitutional reform to strengthen CFE will be approved or not. The most important question is whether the president is willing to tone down his narrative and bridge the gaps between his government and the private sector to get past the standstill that the sector currently faces.

Photo by:   Arturo Carranza