MEXICO ENERGY ALERT: Initiative to Radically Change Mexico’s Electric Power Industry

On February 1, 2021, Mexican President Andrés Manuel Lopez Obrador submitted to Congress an initiative (the “Initiative”) to amend the Electric Power Industry Law. The Initiative appears to be part of the current administration’s plan to reverse the Energy Reform introduced by former president Enrique Peña Nieto in 2013 (“the Energy Reform”) that liberalized the energy market.

The Initiative is preferential, which means that Congress could approve it in the next two months. As set out in more detail below, if implemented, the Initiative will drastically alter Mexico’s legal framework for the electric power market, affecting private investment.

What Changes with the Initiative

The Initiative’s main objective is to reconfigure the Mexican electric power sector by strengthening the role of the Federal Electricity Commission (Comisión Federal de Electricidad or “CFE”), thus limiting the participation of privately-owned companies.

To achieve that objective, the Initiative proposes the following, among other measures:

• CFE's hydroelectric plants and other CFE plants (g. nuclear, geothermal, combined cycle and thermal) would have priority of access to the electricity grid. Solar and wind farms as well as combined cycle plants operated by private entities would not be prioritized in the supply of electric power production to the grid.
• CFE would no longer be obliged to purchase electricity through public bids organized by the National Center for Energy Control (Centro Nacional de Control de Energía or “CENACE”). As the law stands now, CENACE organizes bids for the purchase of electric power in the country, aiming to obtain the most cost-efficient electricity supply. Instead, the Initiative would allow CFE to purchase electricity from any supplier or generator at its sole discretion. This measure would likely affect final consumers since procurement of contracts would no longer need to prioritize cost-efficiency.
• The Energy Regulatory Commission (Comisión Reguladora de Energía or “CRE”) would be able to grant, assign, modify, extend or reject any permit request through the use of the National Electric System’s planning criteria prepared by the Ministry of Energy (Secretaría de Energía or “SENER”). The Initiative also broadens CRE’s authority to revoke self-supply permits as it includes a new ground for revocation based on “fraud of the law”.
• The issuance of Clean Energy Certificates (“CLC”) by the Ministry of Energy would not depend on the commercial operation date of the power plants. The Initiative’s proposal would allow the approval of CLCs to plants pre-dating the Energy Reform (e. not new projects or re-powering of existing projects to increase clean energy production). This change has been criticized as it would affect the raison d'être of CLCs: the development of new renewable power plants that would allow the reduction of polluting sources to meet the international obligations assumed by Mexico to address climate change.
• CFE would have the power to review the legality and profitability of the Power Purchase Agreements and Power Generation Capacity Commitments entered into by independent electric power producers and CFE. This would entail the review, renegotiation, and potential early termination of the existing contractual agreements. This power has been criticized as it would allow CFE to disregard contractual obligations in light of circumstances that did not exist when the agreements were entered into.

Criticisms and Potential Effects of the Initiative

The Initiative has been publicly criticized and accused of threatening investment in Mexico. The criticisms include that the Initiative violates Mexico’s Constitution and the obligations undertaken by Mexico through international treaties.

The critics have claimed that the Initiative violates the constitutional protections prohibiting monopolies in the electric power sector and the principles of non-retroactive application of the laws, legal certainty, supremacy, proportionality, equal treatment, progressivity, and freedom of trade.

With respect to international treaties, the Initiative has been accused of violating protections contained in bilateral and multilateral investment treaties (to the extent applicable), in particular fair and equitable treatment, thus potentially leading to arbitration claims against Mexico, as well as negatively impacting foreign investment in Mexico. Mexico is a party to a range of international agreements that contain provisions on the protection of foreign investment and international arbitration. The Initiative has also raised a concern that it will undermine Mexico’s obligations regarding climate change mitigation.

In conclusion, if approved, the Initiative is anticipated to substantially alter Mexico’s electric power industry and affect the different stakeholders active in Mexico’s electric power market. The specific impact can be further assessed once there is clarity on the final provisions approved (if this occurs) by Mexico’s Congress.

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* HSF is not qualified to provide legal advice under Mexican law.