Recent electricity sector rule changes in Mexico approved by the lower House of Congress will hurt the country's competitiveness while making it harder to meet its international environmental commitments, observers told S&P Global Platts.
Mexico's congress on Feb. 23 approved a presidential initiative that modifies the order in which national grid operator dispatches energy, which is currently based on cost, to benefit plants operated by state utility CFE regardless of their technology. As is, the bill will allow plants using coal, diesel and fuel oil to be served before wind or solar power plants or other combined cycle plants owned by private investors.
Lawmakers from the president's Morena party together with their allies in the lower chamber approved the initiative with 289 in favor, during a webcast session, where they claimed the initiative served the public interest. 152 lawmakers from the opposition, a minority in both Houses of Congress, voted against the bill amid heated speeches about sovereignty and energy independence that extended for over 16 hours. The bill was sent to the upper House of Congress for its discussion and approval.
The Morena party holds majority in both Houses and is expected to be approved by senators in the coming weeks, after which the bill will be signed into law by the president.
This modification will naturally increase generation costs in the grid, as CFE plants are more expensive than the renewable parks or the private plants in the country, according to Rosanety Barrios, an independent Mexico-based consultant who oversaw the drafting of the reform when she served as senior energy official.
"This will either be reflected in higher bills for consumers or higher subsidies paid by the taxpayer," Barrios told Platts Feb. 24.
Increasing the cost of electricity to industries will not only make them less competitive, it will make it harder for Mexico to recover from the economic crisis caused by the pandemic.
"It´s bad for the country," Barrios said.
This decision affects the entire economy and sends the wrong signal that the government does not care about the environment or international treaties, Severo Lopez Mestre, managing partner at Mexico-based consultancy Galo Energy, said.
"It will completely hamper our ability to meet our global warming commitments," Lopez Mestre told Platts Feb.24, adding that the spillover effect for investments has occurred and will hurt business sentiment even if the law is not passed or is blocked in tribunals afterwards.
This and other moves by the current administration will ultimately result in power shortages for the population as demand does not tolerate "limbos" in investment, Lopez Mestre said.
"Our demand will continue to grow, but you cannot add generation capacity from one day to the other," he said.
According to SENER data, Mexico's clean energy generation capacity is roughly 20% of total demand, with hydroelectric plants representing more than half of it.
In the country's 15-year plan on energy infrastructure, SENER has left clean energy out and is relying on natural gas to meet the future demand. Through 2034, CFE is planning the construction of six natural-gas fired power plants that will be built under long term bilateral agreements directly signed with developers.
The initiative is the latest move by President Andres Manuel Lopez Obrador's administration to undo parts of a constitutional reform carried out by his predecessor that opened the energy sector to private investment for the first time after seven decades of monopoly.
The bill also allows state-owned Pemex to rid itself of the excess fuel oil it is producing with its current strategy of increased refining, another move by the president to reduce imports. Pemex has increased its fuel oil output due to the age and state of its refineries, and is unable to export it under International Maritime Organization (IMO) rules. In 2020, Pemex processed 590,000 b/d of crude on average in its six refineries from which it obtained 293,000 b/d of fuel oil, according to SENER data.
This decision is affecting all types of industries, both national and international, and will ultimately result in diplomatic confrontation, observers have noted.
"As soon as more American companies begin to put pressure on the US government, we will begin to see more action," said Aindriu Colgan, tax and trade policy manager at the American Petroleum Institute during a webinar Feb. 23.
"This will be on John Kerry's radar," Colgan said.
Before leaving office, Secretary of State Mike Pompeo, Energy Secretary Dan Brouillette and Commerce Secretary Wilbur Ross sent a letter to their Mexican counterparts to warn of the harmful effects of measures taken by the Mexican administration on US companies and interests.
The changes could violate Mexican obligations as outlined in the US-Mexico-Canada trade agreement, the letter said.
