The future of energy in Mexico is being shaped by the administration of President Andrés Manuel López Obrador, who wants state-owned energy companies to have more influence over the country’s power projects. Obrador (Figure 1), who assumed the presidency late in 2018, in his first year in office has rolled back moves from the previous administration of Enrique Peña-Nieto, who oversaw constitutional reforms in 2013 that ended state-run monopolies and opened Mexico’s energy markets to competition and investment from foreign and private companies.
Obrador’s move to reduce private-sector incentives to develop renewable energy has led to lawsuits from groups that support renewable resources. Some companies have filed what are called “amparo” lawsuits—in effect, a remedy for protection of constitutional rights—to overturn a government decision from October 2019, a move that the groups said alters a scheme promoting private-sector investment in renewable power generation.
The October rule change also brought criticism from the International Monetary Fund (IMF). The groups supporting renewable power won an initial battle in late November, as a Mexican federal court reversed an earlier decision by a lower court on the October rule change, which impacts a program for renewable energy credits. Companies, including U.S.-based AES Corp. and Italy’s Enel SpA, had filed for injunctions in courts across Mexico, pushing back on a decision by Obrador’s Energy Ministry to grant older, government-run renewable power projects clean energy certificates (CELs) that were supposed to spur the development of new wind and solar farms. The CELs—adopted during the previous administration of Peña-Nieto—are sold at auction to large electricity users that are required by the Mexican government to use certain amounts of renewable energy.
Several other injunctions against the rule change were pending in court in early December. Industry groups including the Mexican Association of Wind Energy and the Mexican Association of Solar Energy have said a change to the policy around CELs would disincentivize investment in renewable energy projects, and that could be the goal of the Obrador administration, according to an industry insider who spoke with POWER.
“Mr. Obrador took office just over a year ago, and he immediately put in the freezer a number of steps that were to be taken on energy reform,” Jose Valera, co-lead of Mayer Brown’s Oil & Gas practice based in Houston, Texas, told POWER. “There has been a change in policy that results in the CFE [Comisión Federal de Electricidad or Federal Electricity Commission] playing a much-larger role than anticipated as part of the reform in electric generation. The majority of new generation capacity will be developed by the CFE, and it is unclear if incentives will be provided at all for renewable energy.”
The Peña-Nieto government specifically sought private and foreign investment in Mexico’s power projects, but Obrador’s government has said it wants state-run groups to lead the development of energy policy. Obrador has said the moves by the prior administration disadvantaged CFE (the state-owned utility) and its ability to obtain CELs for old power plants, including renewable projects such as hydro plants, because the rules were not in place when CFE invested in the projects.
“On energy reform, there were three auctions undertaken in the [prior] administration, for renewable energy, and in the first two auctions, only CFE bid. In the third auction other bidders emerged,” Valera said. “Those auctions had several purposes, including [supporting] renewable energy for Mexico, including hydro, but they also had a number of environmental concerns attached to them. They not only were about increasing the generation capacity of the country, in order to serve increased demand, and increase capacity away from dirtier fuels, they also were about the certificates of clean energy, which producers of wholesale power were required to purchase. That was how the renewable energy was [financed], through the auction of these certificates.”
Moves by the Obrador administration have not only impacted power generation, but the country’s oil and gas industry as well. The 2013 legislation ended the monopoly of state-owned Petróleos Mexicanos (PEMEX), and was designed to attract new private and foreign investment. A number of U.S. companies invested in Mexico’s energy sector with the support of the Peña-Nieto administration; Texas-based oil companies Talos Energy and Exxon Mobil won auctions for offshore exploration projects.
Obrador, though, almost immediately after being sworn into office, canceled two auctions that would have brought large-scale drilling for crude oil and natural gas to the border state of Tamaulipas. It also would have introduced hydraulic fracturing to the region, a drilling technique that revolutionized U.S. oil and gas production, but one that Obrador has vehemently opposed.
About half of U.S. natural gas exports go to Mexico, and with several new pipelines completed in recent months and more under construction, analysts have said exports of natural gas from the U.S. to Mexico could double over the next few years. Mexico today generates more than a quarter of its electricity with U.S. natural gas, a percentage that has been expected to rise as Mexico continues to substitute gas for oil in power generation. Critics of Obrador’s policies argue that the use of imported natural gas, as opposed to gas produced in Mexico, raises power prices for consumers.
Valera, who has counseled the governments of Argentina, Bolivia, Honduras, Peru, and Iraq on energy legislative reform matters, said the CEL law adopted by the Peña-Nieto administration “envisioned that these certificates would only be issued to solar, wind, or geothermal [projects]. The new administration includes natural gas and hydro [projects]. The prior administration [also understood] the value of transmission projects, to interconnect Baja California with the rest of the country, and to connect [Mexico’s] south region with the rest of the country. The [Obrador] administration canceled those projects” in a move during the president’s first few weeks after taking office.
“What seems to be the policy [of the current government] is that there is no need for the private sector to be making money in the power generation industry,” Valera said. “It seems to be the bottom line. In the final analysis, what you have is a desire that the state-owned entities will provide power generation, and the private sector is not needed. The central government will provide what’s needed, going back to the pre-reform [time].”
That doesn’t mean companies have abandoned Mexico’s energy market. To the contrary, Petroquimex, a news service focused on Mexican energy, in late November reported that about 50 companies have registered to participate in a private electricity procurement process for Mexico launched by London, UK-based energy trader Vitol, which runs the MexicoElectrico trading platform. Petroquimex reported that registration for the procurement includes power generators, marketers, suppliers, and end-users, with interest shown in contracts that could move up to 3 TWh annually. Vitol’s platform offers capacity, energy, CELs, and congestion differentials as products that can be bought and sold, and is designed to complement government-backed power auctions, not replace them.
“It is hard to tell where [the Obrador administration is] headed policy-wise, in the medium and long term, other than just continue doing business as usual with the CFE as much as possible, with imported natural gas,” Valera said. “There are many companies, American, European, Asian, interested in developed Mexico’s hydrocarbon resources. The appetite is absolutely there. And some companies are going to continue to develop renewable projects. CFE is the single, largest operator of power generation in the country, and the load to be served by new power projects has shrunk, when you take CFE out of the equation. But Mexico has very attractive renewable sources of power, and some companies remain committed to continuing to develop projects in Mexico.” Valera, though, cautioned that if “auctions for [CELs] are taken out, the development is only going to be a fraction of what it would have been.”
