Move From Contentious Reform to Compromise Still Possible

The government’s efforts to reform the energy sector have reached the constitutional level. As the campaign is coming to an end, everything still remains to be decided. Signs of the government’s willingness to compromise, however, have started to emerge. Mexico’s private industry could benefit from this middle ground, experts say.

Even before the López Obrador administration officially entered into power, it was clear that the new president’s vision for the energy sector would clash with that of the previous government that drafted the 2014 Energy Reform. Soon after the fourth long-term energy auction was canceled, the government began to roll out a variety of measures and decisions. A Supreme Court ruling on a 2021 parliamentary bill to change energy regulation is still pending, but the government has now launched its efforts to change the very Constitution that anchored the reform and the current legal status quo. “The energy sector needs the modifications that can be achieved through the highest legislative level: a constitutional reform,” says Manuel Rodríguez, President of the Energy Commission in the Chamber of Deputies and one of the architects of this new electricity bill.

The contents of the bill can be safely described as contentious. NGOs, think tanks and business associations have shown their concern regarding the reform, its impact on the investment climate and Mexico’s ability to reach essential climate targets. Recently, Mexico received several high-profile visits from US officials, including Secretary of Energy Jennifer Granholm, and Climate Envoy John Kerry. The way the bill would actually be implemented is anyone’s guess, though the contents of the reform are far-reaching. Among its core tenets are the idea that electricity generation would be considered a strategic activity, reserved for the public sector only. CFE and the Ministry of Energy would absorb all responsibilities regarding supply, planning and control of the sector, including permitting. The state utility would gain a fixed market cap of 54 percent of power produced. This leaves a 46 percent cap for the private sector, although the reform’s first proposal did appear to aim to cancel all private generation contracts at the same time. If the bill were to pass as it stands, it would cause a wealth of legal issues, warn experts. “This is the worst possible scenario. The bill is so incoherent, illogical and impractical that, basically, it would lead to a paralysis of the power industry in Mexico,” wrote Claudio Rodríguez, Partner at Holland & Knight, for MBN.

In the government’s eyes, the sweeping changes would set up the country’s regulation to ensure CFE’s rescue, eliminating what it sees as shady business practices and corruption that arrived with the privatization of the once-public industry. Furthermore, it would allow Mexico to reach its desired energy self-sufficiency and boost its sovereign position. “We want the proposal to proceed to benefit all Mexicans. We seek to guarantee access to energy to all Mexicans, which is a human right, and to help the federal economy with lower energy tariffs that help companies be more competitive,” says Rodríguez.

For the private sector, where many say they see no evidence of shady business practices and would welcome a stronger CFE among their ranks, the reform poses several key risks. Other than the billions of investments at stake, many point toward the various climate commitments that both the public and private sectors have made. "If we do not produce clean energy in Mexico, then we will fail in the fight against climate change; we could face tariffs and quotas on our products. We will lose market competitiveness. Furthermore, companies may simply leave if they know that in Mexico they will not be able to meet their clean energy goals," said Alberto de la Fuente, President of the Executive Council of Global Enterprises (CEEG), during the Open Parliament discussion forums regarding the electricity bill.

Willingness to Compromise

Following years of rigid rhetoric from public and private actors, the two extremes of the debate have been clearly laid out. The government alleges that private industry is prone to corruption, signing leonine contracts with the government and enabling the ransacking of Mexico’s energy resources. Meanwhile, the private sector argues that the government merely aims to expropriate energy assets and destroy any progress made to combat climate change by ignoring environmental science and betting fully on outdated fossil fuel-fired power plants. Yet, as the Open Parliament discussions evolved, an ever-growing middle ground began to emerge.

Hans Kohlsdorf, Co-Founder of Energy To Market, is an outspoken supporter of a constructive approach. “I understand that the media and a good part of the energy industry, me included, are absolutely opposed to the radical modifications to the Constitution that have been presented to Congress. Yet, I sincerely hope that we will urgently try to come up with creative solutions to the real problems in the energy sector,” he wrote for MBN. Kohlsdorf says there are many issues that can be improved upon: government grievances related to the pre-2014 Energy Reform legacy market, as well as the lack adequate payment for transmission and backup could, and should, be remedied. In fact, the private sector would gain from these improvements, he says.

Mexico’s public sector also appears increasingly willing to leave its trenches: “We learned that, unfortunately, in matters as sensitive as energy, interests are broad. Private initiatives and the government have different visions but when there is willingness to listen to one another, bridges can be built that lead to dialogue and agreements,” says Rodríguez. One clear motivator would be the ruling coalition’s lack of a supermajority. As such, it would need to find common ground with opposition parties to vote through a constitutional reform. Rodríguez already discussed how the coalition is open to change the bill, such as in the case of independent regulators CRE and CNH: “In Mexico, the plan is for these two organizations to return to a central administration but if that point blocks the advancement of the reform, it will likely be reconsidered. Their return to a central administration is controversial and will be thoroughly discussed. If the final decision is to leave them as autonomous organisms, then that will happen.” Other media have begun noticing further openings in the previously impermeable government discourse, a major success of the Open Parliament, according to Kohlsdorf.

Of course, a compromise means both sides of the arguments lose ground. For the government, it means that its vision will be diluted. For private companies, opportunity within a new status quo would still be a far cry from possibilities seen before 2018. Nevertheless, industry experts agree that the current regulatory uncertainty is undermining progress for all market participants. A scenario in which the current status quo is kept because the government does not manage to change regulation might occur. “This scenario, however, is not a happy one, because we foresee that the administrative paralysis, the rejection of new permits, licenses and authorizations by all authorities in the power industry in Mexico will simply continue,” emphasizes Rodríguez. Despite the entrenched standpoints, both sides could win if a suitable compromise is reached.