Self-Supply Contracts: Cause for Quarrel

As a focal point for President López Obrador’s rhetoric and after last week’s presentation of a bill to amend the Constitution, self-supply contracts can safely be called controversial. Energy experts outline the discussion and show the different aspects to this long-running debate.

Self-supply contracts, called autoabasto in Spanish, are Mexico’s oldest private energy contracts. For a long time, Mexico’s energy sector was fully nationalized following the actions of former President Adolfo López Mateos. Being the state-owned utility, CFE held the monopoly over power production and transmission. Profitability was a lesser concern: unelectrified rural areas needed to be electrified. Electricity prices in the basic supply environment were subsidized, much like they are today. Even when more private industry settled in Mexico, the energy sector remained firmly nationalized. This all changed in 1992, when Carlos Salinas de Gortari allowed independent private power producers to enter the market. And thus, the self-supply scheme was born, as were schemes in which industrialists generated their own power through cogeneration and renewable technology, often referred to as independent power producers (IPPs). Together, they formed the legacy market.

Under the current framework, calling self-supply schemes legacy contracts would be more accurate because they are simply arrangements to purchase energy established before the enactment of the 2014 Energy Reform. With the reform, the Electricity Industry Law (LIE) became the main framework, though it also stated that existing self-supply contracts would remain for as long as they were valid. Because the current legal framework is not particularly old and energy supply contracts often run past 15 years, there are plenty of these agreements thar are still in force. Information from consultant Zumma Energy shows that there are over 422 permit-holding power producers and 2,124 consumers operating in this legacy market. Together, they represent over 14,446MW of capacity, just below 16 percent of the country’s total installed megawatts. Crucially, most of this capacity is non-renewable: 39 percent are combined-cycle plants, 36 percent gas and steam turbine facilities and 20 percent wind farms. Most of these projects hail from Nuevo Leon, Oaxaca, Tamaulipas and Veracruz.

For President López Obrador and CFE Director General Manuel Bartlett, the legacy market is a thorn in their side. “How is it possible that a middle-to-low class family or a grocery store owner pays up to four times more than what an OXXO pays? How did they do it? They obtained special contracts because the laws were reformed or because they are supposedly generators of clean energy. The result, in the end, is that they have a subsidy and those who pay the subsidy are the people,” said López Obrador in a press conference earlier this year, taking aim at the famous convenience store chain. OXXO has become a recurrent topic in the president’s rhetoric, though companies including Grupo Bimbo and Walmart have also been namedropped.

The administration has been vocal about its grievances with the legacy market, which it claims stands against its mission to rescue CFE. Bartlett laments how much the wheeling tariffs for clean energy projects are subsidized, originally as part of a push to drive renewable energy projects. Another major issue is that of back-up power: CFE must supply any energy that private producers cannot generate to self-supply offtakers at the rate of CFE’s basic supply scheme.

Bartlett has spoken out against renewable energy, arguing that CFE must provide the expensive base load while solar and wind projects profit from the dispatch of their cheaper but problematically intermittent energy. “Do you think it is fair for the CFE to subsidize these companies that do not produce power all day?” he asked earlier this year. Aiming to right what it considered to be wrongs, the government has acted to stem the “excess” of the legacy market. In 2020, it hiked up the wheeling rates, though this measure soon stranded in courts. It also froze permits and blocked potential amendments, as well as new load points to these contracts. Public sector officials coming to the rescue of CFE is nothing new, however: “When Manuel Bartlett was a senator, he opposed changes to the existent law to make the self-supply scheme happen because he saw them as a sort of simulation, a black-market version of a proper electricity market,” said José Estandia, Energy Partner at law firm Jones Day, to MBN.

Defending the Legacy?

In Mexico’s current energy sector, public and private entities clearly see the industry differently. For the government, a state-centric approach is the only way to curb neo-liberal immoderation. Private companies that believe in free market dynamics challenge this notion. But a sound rule of law is essential whether a democracy is neo-liberal or not. The Mexican Institute for Competitiveness (IMCO), an NGO and a staunch defender of the Energy Reform, warns that the proposal to reform the Constitution goes directly against established laws and international treaties. This would harm Mexico’s competitiveness, of which citizens in the end will pay the price. By eliminating independent regulators, CFE would face neither checks nor balances. The energy mix would become distinctly dirtier, too, a warning that environmental watchdogs like Greenpeace have communicated too.

Earlier this year, companies in the legacy market also saw the need to defend themselves. The FEMSA group, owner of OXXO, said that 70.1 percent of its stores are connected to a wind farm and that each of these stores pays MX$14,052 (US$682.39) a month for electricity on average. “This cost includes a series of payments to CFE for transport, use of transmission lines and a fixed charge for being part of the national electricity grid,” said the company. The remaining 30 percent of OXXO stores rely completely on CF and pay the utility directly. An enthusiastic user of renewable energy, bread maker Grupo Bimbo also released a statement mentioning that “by the end of 2020, 80 percent of the electricity consumed by the company came from clean sources, contributing decisively to caring for the environment and cutting nearly 400,000 tons of CO2 emissions.” The group aims to be using 95 percent renewable energy by 2023.

María José Treviño, Country Manager of consultant Acclaim Energy has extensive experience in the legacy market. In an earlier Expert Contribution on MBN, she outlined the issue. “Due to misinformation on how the mechanisms around self-supply work, these media hits are resulting in bad press since these large energy consumers are being portrayed as evading the law by paying a fraction of the energy bill that actually corresponds to them,” she said. It is very true that companies in the legacy market pay less for energy, but they do so in an efficient and legally valid framework. “The savings created by these companies come from efficient generation, renewable energy technology, mutually agreed-upon terms and conditions and transmission and distribution ‘benefits’,” continued Treviño, adding that the extensive legal battle that followed previous measures had only generated uncertainty, increased operating costs and negatively affected Mexico’s potential to attract investors. What is more, Treviño argues that if sudden regulatory action is taken, demand will surge and there will simply not be enough supply to meet the demand, a problem that is only exacerbated by a stop to greenfield project developments and increasing demand for clean energy from C&I players.

But not all those criticizing self-suppliers come from the public sector. Hans Kohlsdorf, Founder of Energy to Market (E2M), finds fault with the legacy market because companies refuse to enter the Wholesale Electricity Market established under the LIE. “They defend themselves like a distressed cat to ensure the reform of seven years ago does not apply to them,” he wrote in an MBN article. In Kohlsdorf sees these players as against the 2014 Energy Reform, just like the current government is: “That is right, two important groups are against the reform enacted in 2014: the country's large generating and consuming companies and the 4T government. It is difficult to decide which group is more conservative since both are pursuing a status quo that existed in the previous century,” he criticized.