Mexico launches debate over controversial energy reform
— Lawmakers to discuss proposals that would limit private companies’ involvement in Mexico’s power industry
By Tom Azzopardi
Mexican lawmakers this week will begin debating President Andres Manuel Lopez Obrador’s proposal to radically overhaul the country’s power industry.
Work is kicking off with a four-week open parliament at which experts, business leaders and others will meet with lawmakers to discuss every aspect of the wide-ranging changes which critics say has stopped the country’s wind energy boom in its tracks.
Under the constitutional reform unveiled last October, the state through public utility Comisión Federal de Electricidad (CFE) would retake control of the sector becoming responsible for setting tariffs and deciding which plants operate when, while an independent regulator would be scrapped.
It represents the president’s latest attempt to reshape the industry after previous administrative and legal efforts have been held up in the courts.
Like them, the reform effectively dismantles the liberalisation of the power industry undertaken by Enrique Peña Nieto the predecessor of current president Andres Manuel Lopez Obrador’s – popularly known as Amlo. Nieto’s reforms opened up the industry to free competition and private investment.
Under the proposal, all the permits and contracts granted to private companies since then would be torn up and their participation in power generation limited to 46% of total supplies.
Led by Amlo, a firm believer in the need for a powerful state, the government argues the reform is necessary to regain control of an industry which is strategic to Mexico’s development and the well-being of the population.
They point to the energy crises which have hit Spain, the UK and Texas in recent years which they blame on market liberalisation and overly hasty expansion of intermittent renewable technologies.
“If you don’t have control over electricity, then you are going to have problems, and today we have many examples,” Mario Morales, a senior executive at CFE, told Windpower Monthly.
An investigation by the company blamed the faulty connection of a wind farm by Acciona for a December 2020 power outage which left more than ten million Mexicans across twelve states without electricity for several hours.
Rather than multinationals backed by faceless investment funds, it should be the state which is responsible for ensuring a basic supply like electricity, Morales said.
Controversial reform
But critics of the reform say the proposal risks reversing all the gains made during the last decade during which direct foreign investments in Mexico’s electricity generation sector have grown at an average rate of 54% year over year, according to the Spanish Chamber of Commerce. This has caused energy prices to fall sharply.
The costs to the economy could be enormous.
If approved in its current form, the reform could cost around MXN 260 billion (almost US$13 billion) or almost 1% of Mexican GDP, according to a study by the think tank Centro de Investigación Económica y Presupuestaria, A. C. (Centre for Economic and Budgetary Research).
Most of that cost will derive from compensation that the Mexican state would have to pay for the loss of earnings after the generation permits have been cancelled after foreign investors sue under investment treaties.
The rest is based on higher operating costs as CFE cranks up shuttered thermoelectric plants, increased health spending derived from the emissions generated and more subsidies to keep power prices for households and businesses.
Rather than fix any real problem in Mexico’s power supplies, the reform is little more than a power grab for ideological reasons, the think tank believes. “This appears to be being done for political rather than economic or technical reasons,” Joel Toniatuh Vásquez, one of its authors, told Windpower Monthly.
Chilling impact
The government drive to take control over the energy industry has already chilled industry development – especially the once-booming wind sector.
Investment in new wind farms is expected to fall to US$900 million this year, down from US$1.5 billion in 2021, and a peak of almost US$5.0 billion in 2018, Leopoldo Rodriguez, president of the Mexican wind energy association Amdee, told journalists earlier this month.
Wind projects with around 7GW of capacity in development or construction have been left in limbo as investors assess the impact of the rule changes,
“Although new plants will be connected in the coming months, we don’t see a clear panorama ahead when the reality is that Mexico could have more than 15,000MW of wind capacity within four years,” Rodriguez said.
Business leaders aim to put their concern to lawmakers during the next four weeks of intense debate. Divided into nineteen different commissions tackling every aspect of the industry, the level of the discussion during the open parliament is expected to be high level and technical, said Arturo Carranza, an energy analyst at Akza Advisors.
Critics hope that will lead the government to tone down some of the reform’s most radical points.
So far President Lopez Obrador has signalled that only a side proposal to keep Mexican lithium reserves in the hands of the state is non-negotiable.
But even if the government makes compromises to win the opposition support, analysts say the impact is still likely to be enormous.
“The main problem with the reform is not in the details but in its spirit which is quite destructive,” said Victor Ramirez, a director of energy consultants Perceptia21 Energia.
Long road ahead
Although Amlo’s Morena party and its allies have a majority in congress, they lack the two-third majority to approve a constitutional reform like this on their own. The right-wing Partido Acción Nacional is dead set against the change. As a result, they will have to negotiate with lawmakers from the opposition Partido Revolucionario Institucional (PRI) – almost four-fifths of whom would have to support the proposal for it to pass.
Although Lopez Obrador wants to wrap the debate in the coming parliamentary sessions (which ends in April), debate is expected to last a long time. Even if approved by the end of the year, as opposition politicians propose, changing all the secondary laws and regulations needed to implement the reform could take months or years
“This could be much more complicated from a political point of view because there are so many details… This is a huge effort that will take until the end of this government when people will be looking at the presidential elections,” said Akza Advisors’ Carranza.
Faced with criticism over the impact of the reform on generation costs and Mexico’s climate footprint, the government has changed its tune slightly. CFE has included more renewables in its business plan, including an overhaul of its hydroelectric plants and a giant solar park in the northern state of Sonora.
But despite these efforts, renewables are going to play a smaller role in Mexico’s energy supplies than before.
“The growth will be probably slower because it will be in the measure that the system requires and the expansion of the economy allows,” said CFE’s Morales.
But by slowing the energy transition in Mexico, the government’s plans will make it impossible for Mexico to meet its international commitment under the Paris climate agreement to reduce its carbon emissions.
“It is not only the future of the energy industry at stake, but our sustainability,” said Amdee’s Rodriguez. “Today three-quarters of electricity is generated from fossil fuels and the ideal would be to reverse that ratio.”