Pedro Joaquín Coldwell
Minister
Ministry of Energy
/
Insight

Operating Framework for Energy Projects

Wed, 02/19/2014 - 09:41

The renewable energy sector’s operating framework depends mainly on three government entities: the Ministry of Energy (SENER), CRE, and CFE. SENER oversees Mexico’s energy policy to guarantee competitive, economically viable, and environmentally sustainable energy supply needed for national development. In other words, SENER establishes the long-term energy strategy, after which the entity works with other ministries to make sure the regulations cover specific characteristics of each energy source and the costs associated with externalities.

The Energy Regulatory Commission (CRE) was created by decree in 1993 as a decentralized administrative agency responsible for addressing matters, as defined in Article 27 of the Constitution, regarding energy. The commission’s fundamental objective is to efficiently regulate the electricity, hydrocarbon, and gas sectors providing legal certainty to foster investment and promote healthy competition among the different players, while ensuring coverage at competitive prices for the consumers; CRE’s regulatory character makes it essential. It is also in charge of approving budgets for power infrastructure requested by federal entities, municipalities, and other users of this public service.

The Federal Electricity Commission (CFE) is the national utility in charge of power generation, transmission and distribution as well as managing the national power grid. The Electric Public Service Law (LSPEE) states that CFE must produce the most affordable energy, while the Law for the Energy Regulatory Commission states that CRE should verify that energy distribution entities offer their product at a low cost while maintaining quality and keeping the national electric system stable and safe. CRE is in charge of determining tariffs for the supply and sale of electricity. Even though CRE is independent from SENER, the commission’s regulatory framework states that it must provide insights when SENER requests them. Some of the matters in which CRE advises SENER involve the energy sector program, expansion of the national electricity grid, CFE’s projects, participation of private parties in the electricity sector, and establishing the terms and conditions for tenders and concessions. Natural gas is also part of CRE’s responsibilities, so it must approve the terms and conditions for the first-hand sale of natural gas and LP gas unless the Federal Competitiveness Commission has stated conditions that indicate otherwise, and approving the terms and conditions for the transportation, storage, and distribution of natural gas and LP gas.

Regarding renewable energies, CRE grants and revokes permits for electricity generation in activities not considered to be part of the public service, such as selfsupply schemes, small power producer schemes, and cogeneration. CRE approves the regulatory instruments that lay out the relationship between permit holders and CFE as part of its objective to drive renewable projects forward. Planning the expansion of the national grid is one of CFE’s duties, along with carrying out the necessary technical assessments for the interconnection of new power generation projects. Projects that use renewable energy sources have become increasingly important in Mexico’s strategy to diversify its energy mix. It is important to note that a significant amount of the private sector’s participation is through renewable energy projects. The modalities under which the Electric Energy Public Service Law (LSPEE) allows private parties to participate in Mexico’s energy sector are self-supply, cogeneration, independent power producer, small producers, power export, and power import. As energy generation activities are subjected to project approval, developers should consider their maximum production capacity and the maximum demand for imported electricity, as well as the final destination of the power. It is also worth pointing out that those interested in developing a cogeneration or renewable energy project should take into account certain considerations. Article 21 of the Renewable Energy Development and Financing for Energy Transition Law (LAERFTE) states that projects over 2.5MW must ensure the participation of local and regional communities in the consulting process and project development. The law mandates that developers should also pay land owners the corresponding fees and promote social development in the local communities where the projects are located.

The legal framework for the electricity industry will see significant changes in the next few years due to the 2013 Energy Reform, which allows public and private investment for electricity generation and commercialization activities, though the transmission and distribution of power will remain strategic areas under the exclusive responsibility of the state. Among other purposes, the reform is intended to transform PEMEX and CFE, the national companies dedicated to respectively hydrocarbons and electricity, into “productive companies of the state.” In order to make this a reality, the Energy Reform approved by the Senate and the Chamber of Deputies amended constitutional articles 25, 27 and 28, and established 21 transitory articles. A timeframe was also defined within which the secondary laws must be enacted. The Mexican Energy Reform has been recognized as an important effort to increase the competitiveness of the Mexican energy sector. The opening up of the Mexican energy sector will bring new opportunities for Mexico in the coming years, following 75 years of intense governmental control over oil and energy resources. The modifications made to the original energy reform document by Congress included different contracting schemes for oil and gas production, which will increase the attractiveness of the market for foreign companies, allowing greater private sector involvement in the funding of exploration and production as well as risk and profit sharing. Though the oil and gas industry will open the door to the private sector there will be no concessions for hydrocarbons, which will remain property of the Mexican State. PEMEX will also remain the priority company for exploration and exploitation activities, over private sector companies.

The Energy Reform includes the creation of two decentralized public bodies: National Center for the Control of National Gas (CENAGAS), which will operate the national pipeline system and natural gas storage facilities, and the National Center for the Control of Electrical Power (CENACE), which will manage the national electric system. Additionally, environmental protection activities will be incorporated through the creation of the National Agency for Industrial Safety and Environmental Protection, which will regulate environmental protection activities within the hydrocarbons sector and waste management activities. As part of the reform, concerted efforts will be made to prevent, identify and sanction corrupt activities. The benefits that are expected to derive from the Energy Reform include increased revenue for the federal government, a drop in electricity and natural gas prices, and the creation of a considerable amount of jobs, with a forecast of 2.5 million to be generated by the year 2025. By opening up the generation area of the electricity sector, increasing investment is expected to enter the Mexican economy, which will boost the renewable energy sector and provide industry with access to cheaper energy sources