What Does Mexico’s Energy Sector Reform Hold for the Power Sector and Renewable Energy Development in Mexico?

Apr 2, 2014

Mexican President Enrique Peña Nieto issued a decree on December 20, 2013, reforming and supplementing several energy-related provisions of the Mexican constitution.  Although most media attention has centered on how the energy reform aims to modernize the Mexican oil and gas sector, the reform also aims to overhaul the Mexican power sector and to support renewable energy generation to feed the same.  The Mexican Congress, according to the December 20 decree, must soon adopt secondary legislation prescribing specific energy reform measures; however, prospects for near-term adoption of this legislation are unclear due to partisan disagreements, and the scope and depth of the draft secondary legislation remain unknown, including in regard to the power sector and renewable energy.  We explore below possible implications of the energy reform for the power sector and renewable energy development in Mexico, in addition to the importance of the energy reform’s coming secondary legislation.

The Peña Nieto Administration argues that the primary objective of the energy reform is to lower electricity rates in the residential, commercial and industrial sectors, and points to several reasons behind existing high electricity rates, including (i) limitations on private power generators, (ii) constraints relating to power transmission and distribution, (iii) organizational and financial challenges within the Federal Electricity Commission (Comisión Federal de Electricidad (CFE)), and (iv) limited access of renewable energy generators to transmission networks.  The energy reform aims to address these areas in order to achieve the primary objective of lowering electricity rates, and the intended changes could have broad implications for renewable energy projects in Mexico.  For example, the Peña Nieto Administration asserts the following about the energy reform:

  • In regard to power generation, the energy reform will allow private generators, in conjunction with CFE, to sell power onto the wholesale electricity market with greater legal certainty and on equal footing with CFE.  Also, such private generators will be able to enter into electricity off-take agreements with traders and/or qualified (e.g., large industrial) customers; and
  • In regard to power transmission and distribution, the energy reform will allow CFE to join forces with private sector actors to finance, operate and maintain transmission and distribution infrastructure.  Additionally, the reform will guarantee open and non-discriminatory access to and use of the national transmission network through the creation of the National Energy Control and Power Market Center (Centro Nacional de Control de Energía y Mercado Eléctrico), an impartial network operator independent of CFE.

  
According to the Peña Nieto Administration, these changes contemplated under the energy reform will provide the government effective energy policy instruments to drive the development of power generation projects with lesser social and environmental impacts, e.g., project development in regions with abundant wind, solar and geothermal resources, as well as in the use of biomass and the construction of small hydroelectric plants.  Additionally, the energy reform creates the Mexican Petroleum Fund for Stabilization and Development (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo) to capture monies derived from oil exploration and production allotments and contracts the Mexican state undertakes; this fund will, in part, finance investment in renewable energy.

The December 20 decree represents major progress toward energy reform; it embodies the constitutional changes necessary for the adoption of forthcoming secondary legislation and implementing rules, which will contain the energy reform’s actual prescriptive measures, including any that could directly or indirectly affect renewable energy initiatives in Mexico.  Specifically with respect to the power sector, the decree states that the Mexican Congress must adopt by mid- to late-April 2014 legislation to (i) foster the open and non-discriminatory access to the national transmission network, (ii) regulate private sector participation in the financing, installation, maintenance, management, operation and/or expansion of transmission and distribution infrastructure, and (iii) regulate exploration and exploitation of geothermal resources for electricity generation.  The decree also orders the Mexican Congress to adopt within the same timeframe environmental legislation establishing obligations for power sector participants on clean energy as well as emissions reduction.  The Mexican Executive Branch will have an additional 12 months, (i.e., until approximately April 2015, barring delays) to issue a decree making CFE’s National Energy Control Center (CENACE) into an independent system operator to be called the National Energy Control and Power Market Center.

That the energy reform’s secondary legislation and implementing rules remain forthcoming means that it is still uncertain whether the reforms will truly usher in a new era of renewable energy development in Mexico, as the Peña Nieto Administration has promised.  Furthermore, the infighting within the coalition that pushed the energy reform forward could imperil the deadlines the decree established for Mexican lawmakers.  While energy investors remain optimistic, including those in the realm of the power sector and renewable energy, a protracted process of crafting the secondary laws will give the energy reform’s opponents more time to limit its scope.  It therefore remains unclear how expansive the Mexican power sector reforms will be and when they will be implemented, and accordingly, how such reform will impact renewable energy initiatives in Mexico.