Mexican electricity reform set to raise trade tensions with US

Mexico has proposed a sweeping overhaul of its electricity market to favour its state-owned utility, in a move that would deal a blow to the use of renewable energy in the country and raise trade tensions with the US and Canada.

A fast-track bill introduced in Congress would change the order in which electricity is dispatched into the national grid, sending private investors to the back of the queue behind power from CFE, the state utility.

Renewables producers, currently dispatched first because they are the cheapest, would lose that premier place.

The bill — the boldest overhaul in months of attempts to change rules in the sector — is expected to pass in Congress, where the Mexican government has a majority in both houses. It said it sought to end “years of sacking” by the private sector.

“It’s open war,” said Carlos Ramírez at Integralia, a consultancy, who saw the move as a step forward in President Andrés Manuel López Obrador’s desire to overturn a landmark 2013 law deregulating the energy industry. “It’s a sign the government is becoming more radical.”

One former energy sector official said some $41bn in private sector investments in electricity generation could be at risk and experts forecast it would trigger lawsuits, including under the USMCA free-trade treaty with the US and Canada.

Pablo Zárate, managing director at FTI Consulting, said that “although this bill does not mention expropriation or nationalisation, it does seem like the kind of action that could be considered to have expropriatory effects”.

Only last month the US warned Mexico that private investment under the USMCA as well as “hundreds of millions of dollars” in development aid co-operation was at risk from attempts to favour state energy companies. “We are obligated to insist that Mexico lives up to its USMCA obligations,” the US wrote in a letter signed by the former secretary of state Mike Pompeo and his energy and commerce counterparts.

Among other provisions, the new bill would scrap the use of long-term auctions for power purchases, calling such auctions “a perverse machination dreamt up with the sole aim of guaranteeing profitability to investments by private generators to the detriment of the CFE”. The bill also sought to scrap so-called self-supply contracts, which allow companies to generate electricity for their own use.

Ramses Pech, an energy consultant, said scrapping auctions “left the door open to corruption, since it would just be up to CFE who they contracted”. Dispatching power from high-cost CFE plants into the grid first would push up costs, he said.

The new bill also contains provisions to enable CFE’s ageing hydropower plants to obtain clean energy certificates, a move the industry says is a disincentive to investment in green power.

Jeremy Martin, energy vice-president at the Institute of the Americas, said the bill made clear climate commitments were “irrelevant”.

Mr López Obrador, a fossil fuel champion, said Mexico’s energy laws had left CFE “in ruins”, making moves to prioritise CFE a strategic imperative. CFE posted a $3bn loss in the first nine months of 2020, slipping into the red versus the same period in 2019. It has struggled with ageing infrastrcture and high pension costs.

Although self-supply contracts have been in force since 1992, the bill said Mexico’s 2013 energy reform enabled supply to third-parties, constituting “a fraud on the law”.