Mexico’s New Power Industry Law: Implications for Clean Energy

Aug 28, 2014

On August 11, 2014, Mexican President Enrique Peña Nieto enacted secondary energy reform legislation, thus concluding a legislative process to overhaul Mexico’s energy sector that stems from a December 20, 2013 decree modifying several energy-related provisions contemplated under the Mexican constitution, a topic about which Nexant has blogged in the past.  While the press has focused its attention primarily on the Reform’s implications for Mexico’s petroleum and natural gas sectors, Mexico’s power market will also undergo considerable changes in the coming years as a result of the Reform, and these power market changes will, in turn, hold implications for clean energy roll-out in Mexico.  With the enactment of the Energy Reform’s secondary legislation, principally the Power Industry Law, it is now possible to better understand the nature of these power sector and clean energy implications.

The Power Industry Law is perhaps the piece of secondary energy reform legislation that holds the greatest implications for change in the Mexican power sector and clean energy related thereto.  This Law focuses on (i) generation, (ii) transmission and distribution, and (iii) trading of electrical power.  Nexant discusses below how the Power Industry Law aims to change the Mexican power market in these three areas:

  • Generation. The Power Industry Law further opens power generation to the participation of private actors, establishing a legal framework aimed at ensuring fair competition between public and private power generators and guaranteeing these public and private generators access to power transmission and distribution infrastructure under non-discriminatory rules.  This opening looks, in part, to draw greater levels of private investment to solar and wind energy project development in areas of Mexico that present attractive solar and wind resources.
  • Transmission and Distribution.  While the December 2013 constitutional changes clearly establish that the planning and control of the Mexican power market, in addition to power transmission and distribution, will correspond solely to the Mexican government, the Power Industry Law sets forth the rules under which the state may contract through private actors for the financing, installation, maintenance, management, operation, expansion, modernization, monitoring and conservation of power transmission and distribution infrastructure.  Additionally, as a result of the energy reform, an impartial body autonomous of the Federal Electricity Commission (Comisión Federal de Electricidad (CFE)) will perform such power market planning as an independent system operator (ISO), thus ostensibly affording many clean energy generators greater cost-based access to the Mexican power market.
  • Trading.  The Power Industry Law also allows for the participation of private traders to participate in the Mexican power market.  Such private power traders may engage generators and certain qualified consumers (i.e., >3 MW, initially) to buy and sell electricity either on the spot market or through long-term contracts with freely-negotiated prices.  Such private trader participation in the Mexican power market provides a larger and more diverse market (i) onto which clean power generators may sell the electricity they produce, and (ii) from which power consumers may buy such clean electricity.

 

The Law also provides for a Clean Energy Certificate (CEC) system, under which the Secretary of Energía (Secretaría de Energía (SE)) will set a percent threshold for annual clean-to-conventional energy production, and power suppliers and qualified consumers uphold such threshold by purchasing CECs from clean power generators.  The Peña Nieto Administration claims that the CEC system will ensure demand for the energy renewable power projects produce, and will provide these projects the income required to recover the investment made in them.

 

 

While the Power Industry Law is not the only piece of Energy Reform secondary legislation that holds implications for the power sector and related clean power roll-out in Mexico, it is the law that likely represents the most fundamental change for the Mexican power market moving forward.  However, other pieces of secondary legislation will also peripherally affect Mexican (clean) power: (i) the Coordinated Regulatory Bodies Law, which aims to fortify the power sector regulator, i.e., Energy Regulatory Commission (Comisión Reguladora de Energía (CRE)) and give it technical, budgetary and operational autonomy to better fit a more competitive Mexican power market in which private actors will now participate, (ii) the General Law on Public Debt, which affords the CFE greater budgetary autonomy, thus facilitating CFE’s engagement with private (clean) power generators; (iii) the Foreign Investment Law, which allows for foreign investment in power generation and trading activities and, through contracts with the government, in power transmission and distribution, (iv) the Geothermal Energy Law, which aims to regulate the prospecting, exploration and exploitation of geothermal resources for energy development in order to generate electricity, among other uses.

 

 

The Peña Nieto government has thus far marketed the Energy Reform as a way to reduce energy costs for both businesses and consumers.  With respect to the power sector, that several pieces of the related secondary legislation now allow private actors to participate in power generation, transmission and distribution, and trading certainly sets the stage for electricity rate reductions and also augurs well for increasing clean energy’s share of the Mexican power market.  Nonetheless, how effectively Mexico’s future ISO affords cost-based access to (clean) power generators remains unclear; Mexico’s Executive Branch issued on August 28, 2014 a decree creating the ISO and establishing its organization, operations and powers, and CFE has until late-November to transfer to this ISO all the human, material and financial resources necessary for effective power market planning.  Consequently, the new reformed Mexican power sector will not begin to truly take shape until mid- to late-2015, and any private clean energy investment boom in such sector will likely occur thereafter.