Mexico’s new electricity law could boost the country’s energy sector. But big questions remain.

BY DAVID L. GOLDWYN AND CÉSAR EMILIANO HERNÁNDEZ OCHOA

Mexican President Claudia Sheinbaum has launched a new strategy to address chronic issues of underinvestment in Mexico’s power sector. This strategy is a hybrid approach: It keeps some of the market mechanisms of Mexico’s 2013-14 energy reforms and preserves the country’s legacy self-supply and independent power producers (IPPs). But it also establishes primacy for the national electricity company, the Federal Electricity Commission (CFE). Contained in the new Plan Mexico and the Electricity Sector Law (LESE) passed by the Mexican Senate on February 26, this strategy provides some welcome stability for investors after six years of disruption and uncertainty under the country’s previous president, Andrés Manuel López Obrador. But many questions about how the law will work remain.

How previous presidents approached power

Mexico has long suffered from underinvestment in electricity generation, transmission, and distribution. Power outages are a persistent and growing challenge, electricity prices are higher than those of the neighboring United States, and much of the country is underserved in power access and reliability. CFE is undercapitalized and saddled with expensive and carbon-intensive infrastructure. Indeed, it reportedly lost close to six billion dollars in 2024.
This undercapitalization is a core political challenge for every Mexican government. If the most profitable customers are served by private competitors or supply themselves, then CFE has little hope of growing a credit-worthy market—especially when it is already saddled with providing guaranteed subsidized power to the residential market. Lacking capital, the country needs private-sector investment to grow generation capacity.

This problem has been apparent for a while, and several ways of addressing it have been tried before. President Carlos Salinas de Gortari, who served from 1988 to 1994, introduced IPPs and self-supply schemes to allow CFE to lease modern gas-fired power plants and let industry generate its own electricity. More recently, President Enrique Peña Nieto passed a comprehensive constitutional and legal reform to Mexico’s energy policy in 2013 and 2014. These reforms made CFE a special productive enterprise that competed with the private sector on an equal footing, created multiple independent regulators for industry supervision, and held highly successful auctions for renewable power.

Then López Obrador, who governed from 2018 to 2024, disrupted the reforms with executive and legislative attempts to overturn them. While these attempts were not successful during his term, in practice, the winners of renewable auctions saw the economics of their projects destroyed when they were denied the interconnection, green certificate, and priority-of-dispatch benefits they were entitled to under the reform. When the ruling Morena party won both the presidency and legislative supermajorities in the July 2024 elections, López Obrador ultimately passed constitutional changes that reversed many of the Peña Nieto reforms and restored CFE’s primacy in the power sector.

How Sheinbaum’s plan could work

The new law, which is expected to be approved by the Chamber of Deputies before the end of April, creates a hybrid framework where CFE has “prevalence” in the power system, with a requirement that it retain 54 percent of the nation’s power generation. The private sector can provide the balance, and every year the national planning authorities will review whether the correct balance has been maintained. The law requires that new renewable energy also provide storage to maintain grid stability.

The Plan Mexico and CFE’s 2025-2030 Expansion Plan promise major government investments on transmission and distribution and adequate funds for the government to build up to 6 gigawatts in gas generation over the next six years to fulfill its share. The Plan Mexico also pledged, and the new law incorporates, “one stop shopping” for expedited permitting. This allows for some small-scale self-supply without a permit: less than 0.7 megawatts (MW) distributed generation and up to 20 MW self-supply with a permit but with very tight rules that require the consumer to apply for the permit.

Importantly, the law also introduces two new schemes for CFE projects financed by the private sector: the Long Term Producer, which is a new type of IPP that will sell electricity exclusively to CFE, and the so-called Mixed Investment. The Mixed Investment is an electricity company controlled by CFE in which private investors can participate as minority shareholders, and that could sell electricity to CFE or to private customers. This follows a precedent set by Energia Quantum, a government-controlled private company that owns thirteen plants bought from Iberdrola Mexico. CFE has already announced that it will tender the first new projects (to add 2,376 MW generation capacity) in the first four months this year. The framework is essentially buying time for CFE to grow enough to provide grid-based solutions to all major consumers and right-size its finances.

There is much that is positive in this new plan and proposed law. Project developers would, in theory, be guaranteed that the power they generate would be dispatched on an economic basis once they have a permit and their project is incorporated in the national plan. Previously, CFE’s own generators took priority even though the law was supposed to create a level playing field. The plan’s commitment to increasing renewable energy’s share of the mix is welcome and important for Mexico’s energy security, given the country’s deep reliance on US natural gas. The self-supply and IPP projects, which were built under prior legal regimes, are preserved—a welcome sign of stability for investment.

While the new framework is likely too restrictive to attract new investors to the power sector, the major private-sector players that have prospered over the past six years, who have worked with CFE, and who already operate at scale are well-positioned to participate in this new phase. It is also helpful that the law would allow for some smaller scale new self-supply, even if the rules are restrictive, so that some businesses can provide their own power without waiting for a new permit. There is also some welcome financial flexibility allowed for CFE itself. Under the plan, CFE would have the authority to develop its own generation capacity and access private financing and capital.

Eight ways the plan could fall short

There are also major risks and drawbacks to the new approach.

First, with the Secretariat of Energy exercising complete discretion over which private sector projects are permitted, the lack of merit-based selection and transparency is a major integrity risk.

Second, the regulations will need to make clear which projects are scored in the government’s 54 percent share and which are not. If CFE contracts with a private company to supply it with power, for example, which basket is that contract in?

Third, the costs of private-sector generation may be uncompetitively high. The new rules restrict the right to build transmission to the government alone. If a generator needs a new substation or transmission line, it can build it with permission—but the infrastructure needs are discretionally determined by the National Center for Energy Control (CENACE) and must be donated to the government. And if, for example, CFE contracts with a Long Term Producer for a 500 MW facility and the power plant has the capacity for 700 MW, the company cannot sell the excess power. The owner must transfer property of the plant to CFE without compensation at the end of the contract (e.g., a typical IPP contract lasts twenty-five years, and a combined cycle plant has a life cycle of forty years). These ancillary expenses will raise the cost of every project.

Fourth, the economic viability of private projects depends on regulated rates and charges (e.g., transmission) set by the new regulatory authority (the National Energy Commission) and by the system and market operator (CENACE). These two are formally independent but ultimately controlled by the minister of energy. Will they set reasonable charges and rates that allow private companies to recover costs and compensate for some ancillary costs that result from the new law (e.g., the cost of connecting self-supply to the grid, or the cost of storage for renewables)?

Fifth, will CFE have the technical and financial capacity to procure its 54 percent share (including getting access to gas turbines, which seem to be backlogged for years)? CFE’s track record over the past several years has been less than stellar, with many projects that were to be completed in 2024 now scheduled to start in 2025-2027. If not, will the private sector be held back while it waits for CFE to deliver its share? Down the road, how can the total generation “pie” grow, if it will be dependent on new money for CFE?

Sixth, will the new regulations assure that “prevalence” for CFE does not mean primacy in dispatch or allow for other types of unjustified discrimination? The government seems to be saying that dispatch will be on economic terms if a power provider has a permit, but if transmission is constrained, will this still be the case? The rules need to provide clarity and legal protection with recourse.

Seventh, the government has not yet promulgated a national plan for natural gas supply. There is some excess capacity which can be utilized for the first wave of projects, but more gas will be needed for the government to meet its planning goals. The challenge to new infrastructure lies on the Mexican side of the border. The government will need to support the procurement and permitting of new infrastructure and help expedite the completion of projects already permitted to ensure that its new plants are well supplied.

Finally, the rules for distributed generation and the new self-supply (0.7 MW and up to 20 MW) could be unhelpfully tight. For many areas of Mexico, such as the southeast, grid connections may take some time to arrive. A permissive structure could deliver power and development on a faster timeline. Likewise, the demand for power for near-shoring and additional data centers, coming from industrial parks in the north of the country, is imminent in the next four years or so. Distributed generation and self-supply could provide competitively priced power faster there as well. Perhaps a time-limited program, with projects required to be under development within four years, could balance CFE’s long-term goals with industry’s short-term needs.

Some of these questions will be answered when the final regulations are promulgated, which is expected to happen in the next few months. In the interim, the Sheinbaum government deserves praise for its active engagement with the private sector over how these rules are to be drafted. Time will tell how quickly permits will be granted and whether the new framework encourages or restricts growth. But given the government’s ideological commitment to the dominance of state enterprise, this new framework has the potential to grow generation and support the president’s commitment to her energy transition goals.

Mexico’s economic competitiveness hangs in the balance. But this government has a practical, technocratic approach that may allow for adjustment down the road if needed.

David L. Goldwyn is president of Goldwyn Global Strategies, LLC, chairman of the Atlantic Council’s Global Energy Center Advisory Group and a former special envoy for international energy affairs at the US Department of State.

César Emiliano Hernández Ochoa is a managing partner at Publius, a Mexico City law firm, and served as deputy secretary of energy for electricity for SENER, Mexico’s energy Ministry, from 2014-2017.

This article was originally published by the Atlantic Council. Republished with permission from the authors.

More Perspectives