Mexico’s Shift in Energy Policy: Constant Wave of Uncertainty
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Mexico’s Shift in Energy Policy: Constant Wave of Uncertainty

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Fri, 07/22/2022 - 11:34

President López Obrador has made the energy agenda a central axis of his political project. Since the beginning of his administration, the president has sought by various means to reverse the liberalization of the Mexican energy sector and give power back to state companies PEMEX and CFE. There have been some hits and misses in López Obrador’s proposals, but the battle seems far from over.

From the president's perspective, CFE was extremely weakened by the 2013 Energy Reform promoted by the government of his predecessor, Enrique Peña Nieto. This reform sought to end the state-owned company's monopoly to encourage competition in electricity generation and supply. This decision in favor of free competition between the state and the private sector was strongly criticized before López Obrador’s election.

López Obrador’s discourse in defense of CFE has been focused on the principles of national sovereignty and energy security, since, in his opinion, Mexico should not depend on private energy generation, as national interests would not be guaranteed. The president says that opening the electricity market granted unlimited benefits to the private sector at the expense of CFE. Weakening the state utility would end up threatening with the company's disappearance, putting the National Electric System (SEN) and the country's energy security at risk, states López Obrador.

To prevent this, the government began to use administrative instruments to favor CFE's electricity generation. The first move came in May 2020, when electricity demand drastically reduced due to the pandemic. The Ministry of Energy (SENER) issued a decree regarding the reliability, security, continuity and quality in the SEN, which limited the interconnection of new wind and solar power plants to the grid. The argument was that the intermittency and variability generated by these types of plants compromised the system’s reliability in the event of a drop in demand. At the same time, the energy regulator (CRE), issued two resolutions to increase interconnection rates for self-supply companies, eliminating subsidies that allowed them to pay 70 percent less than any other generator, as to reduce CFE's financial losses. Both SENER and CRE’s resolutions were challenged in court through amparos, however, which appealed to the illegality of these actions.


First Attempt at Reform: Electricity Industry Law of 2021

Observing that administrative acts were suspended by amparos, in February 2021 President López Obrador opted to send to Congress a preferential reform initiative to the Electricity Industry Law (LIE). Being a reform to a secondary law, the President only required a simple majority vote, which his party, MORENA, enjoyed at the time. Taking advantage of this favorable numbers, LIE’s reform was approved and published in March.

The changes approved to the law were drastic. First, CFE was automatically granted 54 percent of the market, leaving a maximum of 46 percent participation to private companies. This would recoup the market power that CFE had been losing since the liberalization of the energy sector. In 2020, CFE would produce the equivalent to 38 percent of the market, leaving the rest to private generation. The new LIE also gave CFE, as the sole supplier to Mexican households, the possibility of contracting energy outside of long and medium-term auctions, something it was obligated to do under the 2013 Energy Reform.

One of the most controversial points of the new LIE was the change in the dispatch order for power plants to send power through the grid. The amended LIE eliminated dispatch according to production costs, which favored private renewable plants. Instead, priority was given to contracts "with physical delivery commitment," which excludes solar and wind energy, for the sake of the system’s "reliability." However, CFE’s power plants have higher production costs and higher emissions of polluting gases, which makes them less competitive for private power production.

The reformed LIE also granted CRE the legal capacity to exhaustively review self-supply contracts to make sure that companies are not committing fraud, meaning selling, reselling or alienating electric energy to third parties, and to terminate contracts without further a due if such conduct is found. Another relevant point was the changed regime for Clean Energy Certificates (CELs), an incentive established in the 2013 Energy Reform that sought to encourage new investment in renewables and excluded plants built before 2014. The government proposed that old plants, mainly old hydroelectric from CFE, could also access this scheme, which weakens the ability of the CELs to continue encouraging new investment in renewables.

Shortly after the approval of LIE’s reform, the modifications were suspended by multiple courts following the filing of multiple amparos by the affected companies, as the new secondary law contradicted principles established in the constitution. A few days after its enactment, LIE’s reform became ineffective.


Second Attempt at Reform: Electricity Reform

As amparos invalidated the changes to the LIE, the president sought more drastic measures to secure his vision for the Mexican electricity market. In the fall of 2021, he presented his constitutional reform initiative, the so-called “electricity reform," to Congress. This reform sought to modify Art. 25, 27, and 28 of the Constitution, in addition to adding a series of transitory articles to erase the 2013 Energy Reform.

The electricity reform not only took up the proposals of LIE’s reform but went further in the state's control over the electricity market. First, CFE would receive once again 54 percent of the generation market. The reform also established the cancellation of existing contracts with private companies, electricity purchases for up to 25 years at a fixed price, as well as the elimination of permits for self-supply partnerships between companies. The dispatch was once again modified in favor of CFE.

The reform also sought to eliminate the industry’s autonomous and independent regulatory bodies. CENACE, the body in charge of regulating electricity market criteria, would be reincorporated into CFE, taking away its role as an impartial 'referee' to determine the order of dispatch. Likewise, CRE, which grants electricity generation permits nationwide, would become part of SENER, leaving market decisions in the state’s hands. In addition, the reform established the cancellation of CELs, under the argument that these instruments excluded CFE's hydroelectric plants, which reduced the state-owned company's competitiveness. Moreover, the initiative proposed that lithium, an important mineral for the green transition, should be exploited exclusively by the State.

The electricity reform monopolized the Mexican legislative agenda, while increasing uncertainty in the national electricity sector. After the June 2021 elections, MORENA and its allied parties, PVEM and PT, lost their super majority in Congress, so the president no longer had the numbers to easily pass constitutional reforms. If the reform was to be approved, MORENA had to negotiate with the opposition.

Due to the controversy surrounding the reform, Congress organized an Open Parliament to discuss the key points of the initiative and listen to different points of view. Starting in January, 25 forums were held for a month and a half. The effectiveness of the legislative exercise was strongly questioned, as legislative opinion remained divided. Moreover, the private sector decided not to participate as a sign of protest against the proposed reform. Their points were represented by national business associations, which expressed their strong rejection to the president's proposal.

After the Open Parliament, only one political force had not clarified its position regarding the electricity reform: PRI. MORENA sought PRI's support to secure the qualified majority required for the reform’s approval. However, by the end of March, PRI defined its position against the reform, which left MORENA without enough votes to approve the presidential proposal. The vote took place on Easter Sunday, after multiple moves by MORENA to undermine the presence of the opposition in the vote. The electricity reform was fast-tracked in congressional commissions, where MORENA has a majority. Although MORENA was willing to negotiate and include opposition proposals in the final version of the reform, key points such as the order of dispatch and CFE's market share were kept, which deterred key supporters.

On the day of the vote, Congress had an almost perfect attendance, with 498 out of 500 Deputies present. Opposition Deputies even stayed overnight at the San Lazaro offices to ensure that they could be present for the vote. After a full day of hectic discussions, the electricity reform was voted with 275 votes in favor of the reform and 223 against, falling far short of the qualified majority of 334 votes necessary for the approval of a constitutional reform. The opposition remained united, with its 223 legislators voting against it. The vote marked the disposal of the President's electricity reform, which returned a small degree of tranquility to the energy sector. However, the president's nationalist energy vision remained unchanged.


LIE's Unconstitutionality

Along with the vote in Congress on the electricity reform, regulation on the electricity market faced an important turning point. Along with the wave of amparos against LIE that led to its suspension, opposition Senators, the Federal Commission for Economic Competition (COFECE), and the state government of Colima filed three actions of unconstitutionality against LIE, claiming that its 2021 reform violates free-market principles, the right to a healthy environment and, in the case of COFECE, an obstacle to its constitutional powers to protect free-market competition.

The minister in charge of carrying out the project was Loretta Ortiz, who has historically been against the 2013 Energy Reform. According to Minister Ortiz, LIE’s reform did not violate any of the aforementioned principles, so it should be declared constitutional. The Supreme Court voted on the unconstitutionality actions a week before the vote on the electricity reform in Congress. Since the discussion was focused on unconstitutionality actions, a qualified majority vote of 8 votes in favor or against was required to declare LIE’s reform either constitutional or unconstitutional.

However, LIE's reactivation does not have the reach the federal government would expect. The split vote allows the reformed LIE to remain in effect but leaves the door open for amparos to still be filed against it by the private sector. The voting results dismiss previous legal challenges against LIE. However, the Supreme Court will not issue any jurisprudence on LIE’s validity, since an agreement with a qualified majority vote was not reached.

LIE's reactivation by the Supreme Court represented a small victory for the federal government, nonetheless. Yet, any amparos reaching the Supreme Court are expected to go to the plaintiffs. “When amparos reach their final instance, which could reach the SCJN, a simple majority will be required to grant the amparo. The simple majority of ministers are in favor of the LIE’s reform unconstitutionality, so we can predict that the resolution of amparos will be favorable for the private sector,” said Derek Woodhouse, Senior Partner, CMS Woodhouse Lorente Ludlow, to MBN.

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