STORY INLINE POST
Historically, when a presidential election takes place in Mexico, several important changes and actions take place before, during and after. On June 2, 2024, Mexico will hold federal polls to elect a new president, 128 senators, 500 Lower House representatives (diputados) and nine governors. Indeed, it will be a big deal and it is time to discuss some scenarios for our energy sector.
With a Ph.D. in Law and Energy Policies and 20 years in the Mexican and Latin American energy landscape, I feel I have the credentials to provide ideas about the feasible future of the energy market in Mexico, along with some predictions. As such, without discussing anything political, we shall start by considering four main scenarios.
First Scenario: Current Party With Presidency and Congressional Control
I consider this a very strong scenario, but different final candidates from Morena itself might lead to different results. In general, this scenario would imply not only the continuation of the current so-called Energy Sovereignty policy, but also that the Federal Constitution and namely articles 25, 27 and 28 as amended on Dec. 20, 2013 as a product of the Energy Reform, might be fully or partially amended (at least, there will be a strong political will to that end) to reinstate the energy market as it was in the 1970s (because even the amendments made in 1994 to the Public Power Utility Law (Ley del Servicio Publico de Energia Electrica) would be fully repealed. Again, this Constitutional amendment might be an option for and proposal from some candidates but not others. It might be the case that it is only a political offer but they realize that the financial cost of going through with it is colossal (trials, international treaties, compensation, investors, prestige). However, it is important to note that even in such a scenario, the government will need to honor the contracts in place, structured and awarded as a result of the Long Term Power Auctions and Petroleum Rounds. If not, international treaties and investment protection mechanisms will again be triggered.
In some aspects we are already partially seeing this scenario because many of the programs, contracts, rules and criteria of the Power Industry Law (Ley de la Industria Electrica) and the Hydrocarbons’ Law (Ley de Hidrocarburos), both enacted on Aug. 11, 2014, were halted by the current administration, with no need for Constitutional reform.
In this scenario, we also expect that the Mexican Energy Regulatory Commission and the National Center of Energy Control will remain without independence from the Ministry of Energy and the presidency itself, meaning that permits and studies needed for the development of regulated activities will continue to be interrupted or completely halted. This might change, however, if new financial or technical conditions are finally and seriously taken into account by the new federal administration, allowing a more collaborative context with private investments. This might include much needed investments in transmission lines, clean generation and storage.
Second Scenario: Current Party with Presidency but Without Congressional Control
Also a strongly feasible scenario. This obviously means that the risk of a Constitutional amendment is neutralized. However, depending on the final presidential candidate from Morena, sub-scenarios could emerge. Some might want to keep the Mexican Energy Regulatory Commission and the National Center of Energy Control as puppet institutions of the Mexican MInistry of Energy, while others might not. Some might maintain the moratorium on the Long-Term Power Auctions and Petroleum Rounds, while others, since there have already been rulings on the Power Industry Law (with its amendments of March 2021 suspended by the Supreme Court of Mexico in 2022) and the Hydrocarbons’ Law, might consider their revival. The cost of such action would be close to zero.
This scenario is basically where we are right now (2023), which means that selected companies will be doing businesses with CFE and PEMEX with no transparency whatsoever and long from Mexico’s international commitments to public procurement rules as included in international treaties, while others will be restricted based on ideological criteria or because they are not willing to play under illegal political influence. We expect, as we see today, that contracts and agreements will be honored, including the operation of the Mexican Wholesale Power Market (which includes agreements among Power Market Participants and Qualified Power Suppliers’ activities, among many other structures and figures) and the Oil Licenses awarded during the so-called Petroleum Rounds.
Third Scenario: Current Party Loses Presidency but Maintains Congressional Control
With recent new candidates and new opposition organizations and ideas, this scenario might be feasible. For the energy sector in Mexico, it would mean clear rules, respect of rule of law and administrative changes, allowing confidence of foreign investments in the energy sector. With CFE already operating 55% of the power generation in Mexico (mainly due to the purchase of MIP of Iberdrola’s combined-cycle generation plants) and PEMEX stuck in its permanent financial disaster, this scenario might impose the much needed regulatory independence for the Mexican Energy Regulatory Commission and the National Center of Energy Control.
However, this scenario will mean hard days for the new president because some enactments, appointments and decisions proposed by the Executive Branch will be halted by Congress, which will open the need for difficult negotiations among political parties.
This scenario will perhaps reactivate the Long-Term Power Auctions and Petroleum Rounds, and continue the operation of the Wholesale Power Market, since that does not need Congressional approval. This might also mean changes in (independent bodies) rules to attract investments in necessary trends in power storage, green hydrogen and others. This will require an independent Mexican Energy Regulatory Commission, whose decisions will not need Congressional approval. However, the appointment of new commissioners will require Congressional approval. An independent regulatory body will grant clear rules to field operations, power supply and distributed generation schemes. With the nearshoring phenomena already in place, clear rules would mean that Mexico would take a better lead on the competitive advantage provided by nearshoring.
Fourth Scenario: Current Party LOss Presidency and Congressional Control
Perhaps this is close to an impossible scenario, but even in this case, the subsequent scenarios will depend on who is president. This scenario is not different from the previous one (aside from better ways to obtain appointments and enactments). We might expect prudency in the market since the mistakes made by past administrations cannot be repeated.
In any case, Mexico needs to change its vision regarding the energy sector. As we have discussed many times before, energy supply is a crucial component of economic growth and the attraction of new investments like those needed to take advantage of nearshoring. As strong as it is, no state is permanent nor unlimited in financial resources. This means that a transparent and collaborative mechanism should be activated.
Irrespective of the polls’ outcome and candidates, the technical and financial needs of the whole sector will necessarily impose the need for more open collaboration between the government and the private sector, and not only between selected good friends, to neutralize the investment panels of Canadian and American international treaties. We expect that this will be done through international public procurement, international standards and international treaties and not obscure or political criteria, as is the case today.
As important as they are, both CFE and PEMEX are, however, usurping massive amounts of financial resources that could be used for public security, strengthening the rule of law, high quality public education, medicines, opportunities, sanitation, national water treatment, fighting erosion and degradation of land and sustainability of public and private activities. Those are also integral to national sovereignty.