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Time to Turn the Page on the Electricity Sector Reform

By Claudio Rodriguez Galan - Holland & Knight


By Claudio Rodríguez | Partner - Wed, 05/11/2022 - 11:00

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As everybody knows, the entry into law in March 2022 of the reform to the Electricity Industry Law and the Congressional rejection of the proposal to reform the Mexican Constitution as proposed by the Executive Branch and intended to completely destroy the energy market created in 2014, and even legacy projects created in 1992, are now done deals.

This means that we finally have a framework to work with, even though the amendments to the Electricity Industry Law are not definitive and that administrative silence from regulatory bodies against private investment will continue. However, the good news is that the following important intended changes have been completely discharged and dismantled (included in the Constitutional reform attempt):

  • Transformation of CFE as the sole power purchaser and power supplier in Mexico.
  • Cancellation of the nature of CFE as a state-owned productive company.
  • Dissolution of the Mexican Energy Regulatory Commission.
  • The de facto dissolution of the Mexican Wholesale Power Market.
  • Energy transition efforts solely in the hands of CFE and not as a state and private collaboration.

During the long and inefficient discussions of the Constitutional reform, Mexico apparently lost sight of who really rules or shall rule the continuity, decisions and operations of any given market. Final users, clients and consumers are kings. They have and shall have the power to decide from whom to purchase any product or service. Electricity is not the exception, of course. This is even more evident if we consider that electricity costs are among the most important inputs in the production and final pricing of all manufactured products, not to mention that electricity is also a fundamental input of human life.

We have explored before how important consideration of an efficient, reliable and cost-effective power market is to industrial clients, both foreign and domestic, when deciding where to invest and produce their products. Visibility on power prices and the existence of power service providers are crucial in the attractiveness of any host country, where electricity can be a competitive advantage, as we have said before.

As a result of the rejection by the Mexican Lower House (diputados) of the Constitutional reform attempt, here is how final users, and especially industrial users, will benefit. First, they will continue to decide if they are supplied by CFE or by any other Qualified Supplier. This is important because competition works and even Qualified Suppliers have to make an effort to attract new clients with their proposals and prices. Final industrial users even use RfPs (Request for Proposals) to obtain the best offers and prices from Qualified Suppliers. Better prices will have an impact on manufactured goods.

The structure of the law is such that final Qualified Users are assured that the power will be efficiently supplied by Qualified Suppliers simply because the latter are considered as "load charge responsible;" that is, that they should provide power no matter what. If not, a third party called "Last Resource Supplier" shall intervene and the associated costs will be supported by the Qualified Supplier in breach. Secondly, because the law forces the Qualified Suppliers to have a specific percentage of "firm or physical capacity" (instead of 100 percent financial transactions), in the form of Power Hedge Agreements with private generators.

This creates a second efficient and competitive market. Power generators shall compete to supply such physical capacity to Qualified Suppliers who, again, can create their own RfP processes to choose the best conditions among power generating companies, or GenCos as they are known. So, even at that end of the rope, the market creates efficiencies that translate to better economic offers in favor of final Qualified Users.

Legacy self-supply schemes, in particular the "Autoabastecimiento," will continue, despite the rhetoric condemning them as "illegal," which has never been declared as such by the Mexican Supreme Court. However, some of the permits will no longer be in force, not because of the dogmatic interpretation by the Mexican federal administration but because they have been operating in some cases for more than 20 years and the expiration date is coming due. Renewal is prohibited. However, the power generation capacity will be migrated to the Mexican power market in terms of the Electricity Industry Law, meaning there will be more players and more competition.

In addition to that, industrial companies in Mexico can choose some (let's call them new generation) self-generation schemes ruled by the Electricity Industry Law and which, by the way, were not touched by the reform enacted in March 2021. The first is called "Distributed Generation" and the second is the "Aisle Supply Scheme." The main difference, among many others of course, is that the first is limited to 0.5MW, while the second has no power capacity limit; thus, it can be installed with 5, 10, 20, 40MW or more. New rules for "own needs" were enacted in December 2021 for the Aisle Supply Scheme but industrial companies still have opportunities to consider the same.

Many companies have decided to choose this path and again, several companies are competing to offer this scheme to industrial companies in Mexico. Again, efficiency rules the game and final industrial plants can choose among the better economic conditions.

All this will fortunately continue. The approval of the Constitutional reform was intended to end such successful schemes simply because the reform intended to transform CFE into the sole and unique power purchaser and supplier in Mexico. Even worse, such purchases and offers by CFE were intended not to be ruled by Article 134 of the Mexican Constitution, which states "that public financial resources of the State shall follow efficiency, effectiveness, economy, transparency and honesty to satisfy their objectives."

We still do not understand how that would have helped final users, either domestic or industrial, to have options and secure clean, reliable and cost-effective prices for energy. We still doubt how all that was for the benefit of Mexico as a destination for foreign investment. We do not see how Mexico could have benefited and created a competitive advantage when competing with other regional countries as a Latin American host country of multibillions of dollars of Asian, American and European investments.

Fortunately, we will not have to answer that because we will not see that scenario anymore. Time to turn the page.

Time to work and create value in favor of clients.

Photo by:   Claudio Rodriguez Galan

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