Mexican energy sector: a regulatory update
Jorge A Arrambide Montemayor
Santos Elizondo, San Pedro Garza García
Carlos A Chávez Pereda
Santos Elizondo, San Pedro Garza García
Since December 2018, the Mexican government has introduced numerous changes to electricity regulations, including a March 2021 amendment to the Mexican Electric Industry Law (LIE). These changes are part of Andrés Manuel López Obrador’s crusade against the previous administration’s 2013 energy reform.
In October 2021 the President introduced a bill to reform the Constitution (the ‘Constitutional Reform bill’), which practically nationalises the electricity industry. While the bill is currently being debated in Congress, Mexican energy regulatory agencies are growing increasingly inactive and unresponsive, and in some cases hostile, towards market participants.
Power and oil and gas sector participants have encountered many challenges in their dealings with federal agencies since the first months of the current federal administration coming into power, mostly with the Mexican Ministry of Energy (SENER) and the Mexican Energy Regulatory Commission (CRE). Bureaucratic delays, brought on by the partial closure of regulatory agencies due to emergency Covid-19 safety declarations, have further pushed the national energy sector into a state of uncertainty. Such uncertainty still remains, but recent actions by the government shed some light on what this administration envisions for the future of the country’s energy industry.
Isolated Electricity Supply scheme and Grid Code 2.0
Recent examples of the paradigm shift in energy regulation include the CRE’s new rules on the Isolated Electricity Supply scheme and the new Grid Code 2.0, both published in the Federal Official Gazette at the end of 2021.
The first rule revised the Isolated Electricity Supply scheme, prohibiting local generation once again (among other restrictions). This revision seriously limits the Isolated Electricity Supply scheme, which faces new equity requirements and is restricted on the sale of surpluses by power plants operating under the scheme.
The Grid Code 2.0 introduced a series of changes, mainly in the areas of planning and operation of the national grid, the connection of load centres, and the interconnection of power plants, all with the intention of ensuring the reliability of the national grid.
Just like the policies issued by the federal government in 2020 and early 2021, these new rules negatively affect private participation in the energy sector and predominantly impact renewable energy projects in Mexico. Like previous policies, these new rules have been challenged by market participants in Federal Court and Mexico’s Supreme Court is expected to issue a final judgment on the constitutionality of these policies in the coming weeks.
Nonetheless, the most important battle will be fought in the coming months in Congress, during the discussion of the Constitutional Reform bill introduced by the federal administration on 1 October 2021.
Changes proposed by the Constitutional Reform bill
Some of the key changes proposed by this bill and their probable implications can be summarised as follows:
Discussion regarding the bill has supposedly been pushed back to autumn 2022; however, there is serious concern that the federal administration and the ruling party may rush through the voting process in the coming weeks.
Because the bill is a constitutional amendment, to become law it must be approved by a two-thirds majority of congressmen and senators, and then approved by a majority of the local congresses of each state within Mexico. The President’s political party coalition does not have the necessary votes to pass this legislation by itself, but it is plausible for his coalition will obtain the needed votes from the opposition.
As the bill entails an amendment to the Constitution – rather than to secondary regulation – the defense mechanisms available to private parties will be limited should it pass. In such event, major reactions from foreign governments can be expected, including claims that treaties such as the United States Mexico Canada Agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and other bilateral treaties have been violated based on potential indirect expropriations, preferential treatment to the CFE and discriminatory regulatory actions.
The authors will continue to monitor and assess the challenges that this change represents for those in the energy industry, as well as determine strategies to face them in a timely and efficient manner.