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Mexico: CFE Plan, Power Reform Create Uncertainty
A closer look at CFE business plan and the Mexican power reform initiative.
BY LARRY B. PASCAL
AND SERGIO GUERRERO
As part of the modifications to the Mexican energy reform of 2013, the Mexican government has released the CFE Business Plan for 2021 – 2025, and President Andrés Manuel López Obrador has recently presented a reform package to amend certain sections of the Mexican Electricity Industry Law. Both developments could have a significant effect on the Mexican electric power industry as discussed below.
CFE BUSINESS PLAN
On January 22, 2021, the Mexican Federal Electricity Commission (CFE) released its 2021-2025 Business Plan, detailing its project portfolio and estimated investments in generation, distribution, and transmission for power projects. The plan contemplates an investment of 381.5 billion Mexican pesos (equivalent to approximately US$19 billion) over the five-year period with a focus on natural gas-based energy generation with 53% of this investment designated to the construction of several new power plants and approximately 20% of the total investment designated for the development and maintenance of distribution and transmission infrastructure.
The plan contemplates the construction of thirteen power generation plants, primarily located in the States of Baja California, Baja California Sur, Yucatán and Veracruz (eight of these proposed projects are combined cycle power plants). With these new projects, the CFE seeks to achieve 54 percent market share in the generation segment by 2024. The Plan does not include any new solar, wind, or other forms of clean energy projects for generation. The absence of a renewable energy component has been criticized by certain groups within Mexico, including by environmental groups who assert that without increases in renewable power generation, the country will not be able to achieve its international commitments on CO2 emissions under the Paris Agreement.
As to distribution, approximately 100 projects are estimated for the development and modernization of the power distribution grids and approximately 142 new transmission projects are projected between 2021 and 2025.
To finance the expected projects, the CFE will determine the financing structures as it deems appropriate, either using its own resources or through the use of so-called Long-Term Productive Infrastructure Investment Projects (PIDIREGAS) and the Energy Investment and Infrastructure Trust (Fibra E), as vehicles for some form of private sector involvement.
Additionally, the plan does not provide for any long-term electricity auctions, which might otherwise allow CFE to access power at lower prices. This omission has been criticized by members of several civil and social organizations such as the Mexican Institute for Competitiveness (IMCO).
AMENDMENTS TO ELECTRICITY LAW
On February 1, 2021, President López Obrador presented to the Chamber of Deputies his proposed “Initiative to Amend Certain Dispositions of the Electricity Industry Law” (the “Initiative”). The Initiative is subject to debate and approval by both Chambers of the Congress before its publication and entry into force.
The purpose of the Initiative is to amend the current Electricity Industry Law (EIL) in various ways and in particular as summarized below:
1. The Initiative modifies the current EIL dispatch rules, which are subject to the economic efficiency principle to determine the dispatch order, whereby the production costs will determine which power plants are the first to be dispatched. The Initiative contemplates to give priority to power generated from the following sources and in the following order: first, to hydroelectric plants owned by the CFE; second, to the other CFE power plants (nuclear, geothermal, combined-cycle and thermoelectric); third, to private sector wind and solar private power plants; and last, to private sector combined-cycle power plants.
2. Under the Initiative, the Mexican national grid operator (CENACE) must prioritize the dispatch of power generated by Legacy Power Plants1 and External Power Plants that have a “Physical Delivery Commitment” to the national power grid, relegating to third place the dispatch of renewable energy and combined cycles of private power plants. In addition, only a “Basic Services Suppliers” may execute the new “Electricity Coverage Agreements with Physical Delivery Commitment,” which in accordance with the Initiative are agreements between a generator and a Basic Services Supplier whereby the generator is not only required to sell power or associate products but also required to make physical delivery of the power. Currently, CFE is the only Basic Service Supplier in the Mexican market.
3. By deleting the first paragraph of Article 4 of the EIL, the Initiative appears to eliminate free competition in power generation and marketing. Furthermore, the first section of Article 4 would be modified to establish that CENACE, the Mexican grid operator, will consider the technical feasibility in determining whether to grant open and non-discriminatory access to the National Transmission Networks and the General Distribution Networks.
4. The Initiative also provides that, in granting generation and marketing permits, the Energy Regulatory Commission (CRE) must consider the planning criteria for the national power grid provided by the Ministry of Energy. In this sense, the permits for generation and marketing are restricted to the planning criteria established by the Ministry of Energy in the recently published National Power Grid Development Program (PRODESEN) which mainly focuses on the development of CFE power plants and the natural gas-based generation. This plan appears to diminish the participation of private power plants that generate power from clean energies, such as wind or solar.
5. Under the Initiative, the granting of Clean Energy Certificates will no longer depend on the ownership or the date on which the power plant started commercial operations. The Clean Energy Certificates or “CEL’s” are instruments issued by CRE that support the production of a determined amount of power from clean energies. These instruments were created in order to measure the compliance with the Paris Agreement commitments of Mexico. In that sense, the CEL’s are an incentive to produce power from clean energies in the country, as all clean energies generators are eligible to receive 1 CEL for each MWh generated and the combined cycles generators are eligible to receive 1 CEL for each 5 MWh generated. On the other hand, Suppliers, Qualified Users, and Final Users under a self-supply permit have an obligation to acquire certain amount of CEL’s depending on their consumption. CFE as the only Basic Services Supplier in the country is one of the main required participants to acquire CEL’s in the Mexican Wholesale Electricity Market (“MEM” by its Spanish initials).
6. Contrary to the provisions of the “Guidelines that establish the criteria for the granting of Clean Energy Certificates and the requirements for their acquisition,” which provides that only the Clean Generators that (i) represent a Clean Power Plant that started operations after August 11, 2014; (ii) represent a Legacy Power Plant that produced clean energy and began operations before August 11, 2014; or (iii) the Clean Power Plants that own capacity and have been included in an Interconnection Agreement in compliance with the provisions of the EIL, are subject to receive CEL’s, the Initiative proposes to allow Power Plants that started operations before 2014 to receive CEL’s for their power production, discouraging the development of new clean energy projects in the country and creating a market imbalance.
7. The transitory articles of the Initiative also grant authority to the CRE to revoke self-supply generation permits granted under the previous Electricity Public Service Law (the “LSPEE”) and, per the statement of reasons for this article, the inclusion of new members or partners to the self-supply corporate structure may be considered a fraud (and by implication grounds for terminating the generation permit.
8. Furthermore, the Initiative proposes to revise the “profitability” of the Power Purchase Agreements entered into by CFE or its subsidiaries with independent power producers executed under the LSPEE, in order to review if such agreements comply with the government requirements of profitability for CFE and, if deemed not sufficiently profitable for CFE, such agreements must be renegotiated or be subjected to an early termination.
Finally, the Energy Ministry, CRE, and CENACE will have a period of six months from the date of approval of the amendments to make conforming changes to all related regulations.
Overall, the CFE Business Plan for the next five years and the proposed initiative, if approved, could have a significant impact in new and current renewable energy projects in Mexico with private investment.
Whether the Congress will approve the proposed initiative is currently unknown. Among other considerations, on February 15, 2021 the Mexican Federal Economic Competition Commission (COFECE) sent an opinion to the Congress in which it recommended not to approve the initiative on the proposed terms on competition grounds. Moreover, given how controversial the Initiative is, one might expect possible challenges to the initiative under the USMCA (by the US, Canada, and affected private parties) and under Mexican constitutionality proceedings (amparo).
Larry Pascal and Sergio Guerrero are attorneys with the international law firm of Haynes and Boone. The authors wish to acknowledge the assistance with this article of William (Hunt) Buckley and Natalia Cosio of Haynes and Boone as well.
This article was written for Latinvex.
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