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Written by John Egan for Industrial Info Resources Sugar Land, Texas)-- Mexico's Congress on Easter Sunday blocked an attempt by President Andrés Manuel López Obrador to change the Mexican constitution to guarantee CFE, the Mexican national electric utility, about 56% of the electric generation market, well above what it is today. But that's not the end of uncertainty for overseas companies seeking to operate in a Mexican electricity and energy market that has been undergoing liberalization for years.
The April 18 vote fell about 58 votes short of the two-thirds majority needed to amend the Mexican constitution.
The Mexican president angrily denounced those who opposed his attempt to change the constitution. In an April 18 news conference, held the day after his measure was defeated, he said: "Yesterday a group of legislators committed an act of treason. Instead of defending the interests of the nation, of the people, they openly defended foreign firms that rob and prey."
López Obrador was trying to significantly roll back a market liberalization measure enacted in the early 1990s that opened the Mexican electricity market to overseas companies. Prior to that, the CFE had a monopoly on the generation of electricity.
Since that initial reform two decades ago, foreign-owned companies have taken market share from CFE, building renewable energy generators that were cleaner and more efficient than the CFE's aging fossil-fueled power stations. Foreign companies generate about 62% of the nation's electricity today, according to local estimates. For more on the background to the April 17 vote, see February 4, 2022, article - Energy Companies Await Vote of Mexican Congress on Proposal to Walk Back Power Market Liberalization. Local observers have said CFE is riddled with corruption and highly inefficient.
According to Industrial Info's Global Market Intelligence (GMI) Power Project Database, approximately 179 renewable energy power projects, valued at roughly $25 billion, are under development in Mexico. These include wind and solar facilities. Subscribers to the GMI Power Project Database can click here for a list of detailed project reports.
The Mexican president said his effort was to keep electricity affordable and to preserve CFE as an important national institution.
But U.S. business groups and the U.S. Trade Representative warned Mexico that adopting López Obrador's constitutional change would violate a major multilateral trade agreement, increase electricity prices, and undermine efforts to lower greenhouse gas emissions in order to combat global climate change.
Earlier this year, Neil Herrington, the U.S. Chamber of Commerce's senior vice president of the Americas, said: "The electricity reform bill presented in Mexico's Congress ... is deeply troubling. Such drastic changes would open the door for the reinstatement of a monopoly in the electricity sector and, we believe, would directly contravene Mexico's commitments under the U.S.-Mexico-Canada Agreement (USMCA). Further, these changes would significantly raise the cost of electricity and limit access to clean energy for Mexico's citizens. Unfortunately, this move is the latest in a pattern of troubling decisions taken by the Government of Mexico that have undermined the confidence of foreign investors in the country at the precise moment enhanced foreign direct investment in Mexico is needed more than ever."
A report from the French Press Agency quoted U.S. Trade Representative Katherine Tai as saying, prior to the vote, that "Mexico's energy policies damage the environment, U.S. business and investor interests in multiple sectors, and hamper joint efforts to mitigate climate change."
And a 2021 study from the U.S. Department of Energy's National Renewable Energy Laboratory estimated that López Obrador's measure could increase Mexico's carbon emissions by between 26% and 65%.
In response to the vote on the electricity measure, López Obrador's party, which holds a majority in both houses of the Mexican legislature, on April 19 passed a law nationalizing Mexico's nascent lithium industry. For more on that, see April 21, 2022, article - Resource Nationalism Takes Mexico's Lithium.
Although Mexico's Congress shot down the president's effort to roll back electricity market liberalization, there's plenty of uncertainty hanging over that nation's electricity industry. Last year, Mexico's Congress passed a law that gives preference to CFE generators in dispatching electricity, which has triggered hundreds of lawsuits, according to a tally from Fitch Ratings Incorporated. That 2021 law also canceled all private power contracts and permits, though those permits and contracts could not be canceled until after all the lawsuits have been decided or settled.
After the failure to amend the Mexican constitution, Mexican energy expert Adrian Duhalt, a postdoctoral fellow in energy studies at Rice University's Baker Institute, told Industrial Info: "The most important risk or uncertainty for those electric firms operating in Mexico is the fact that his government may seek to renegotiate or even terminate long-term power purchase contracts. And in that sense, two scenarios may take place: firms may accept to sit down with the government and negotiate, or they could decide to solve matters via legal disputes."
Duhalt was referring to a law, passed by the Mexican Congress last year and recently upheld by the Mexican Supreme Court, that amended the Mexican Electric Industry Law, known as LIE. By giving CFE generators preference in dispatch, and by giving power purchasers the right to cancel private power contracts and permits, the LIE amendment, which passed by a simple majority, provides CFE many of the same advantages as what López Obrador was trying to enshrine in Mexico's constitution.
"For the time being, power operators holding contracts worth billions of dollars in investment are confronting a complex environment in Mexico," Duhalt continued. "Some may even consider the market 'hostile,' as President López Obrador is determined, in the name of energy security, to put his nationalistic approach first."
Duhalt recommended that non-Mexican companies seeking to participate in the Mexican electric power or energy market to become more "familiar with and assess the regulatory and political environment of Mexico. In the end, the rules of the game are not the only factor shaping the business environment in Mexico. The political side of the power sector also is a force to reckon with. Do your homework: Reach out to policy makers and government officials to find out what sort of opportunities the country´s power sector has to offer."
Duhalt continued: "Given the determination of the Mexican president and the fact that he can persuade power firms to negotiate, I do not anticipate any move toward nationalization in the electric or oil and gas market. Oil and gas contracts awarded during the previous administration have been respected. It seems to me that the president was aware that his power bill was not going to pass Congress because his political coalition did not have enough votes (to amend the constitution). I see the 'nationalization' of lithium reserves as an anticipated move that looks like as consolation prize for his political base."
The Fitch bond-rating agency said overseas energy companies faced "ongoing regulatory uncertainty" in Mexico. The agency estimated that Mexico's electricity sector needs about $150 billion in new investment over the next 15 years to meet demand. The agency suggested measures like the 2021 revision to the nation's electric law and López Obrador's effort to change the Mexican constitution would drive foreign investment away.
Although Mexico's Supreme Court found the LIE amendments were not unconstitutional earlier this month, Fitch and other observers said Mexico's lower courts were effectively on their own in deciding the hundreds of lawsuits triggered by the 2021 change to LIE.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
The April 18 vote fell about 58 votes short of the two-thirds majority needed to amend the Mexican constitution.
The Mexican president angrily denounced those who opposed his attempt to change the constitution. In an April 18 news conference, held the day after his measure was defeated, he said: "Yesterday a group of legislators committed an act of treason. Instead of defending the interests of the nation, of the people, they openly defended foreign firms that rob and prey."
López Obrador was trying to significantly roll back a market liberalization measure enacted in the early 1990s that opened the Mexican electricity market to overseas companies. Prior to that, the CFE had a monopoly on the generation of electricity.
Since that initial reform two decades ago, foreign-owned companies have taken market share from CFE, building renewable energy generators that were cleaner and more efficient than the CFE's aging fossil-fueled power stations. Foreign companies generate about 62% of the nation's electricity today, according to local estimates. For more on the background to the April 17 vote, see February 4, 2022, article - Energy Companies Await Vote of Mexican Congress on Proposal to Walk Back Power Market Liberalization. Local observers have said CFE is riddled with corruption and highly inefficient.
According to Industrial Info's Global Market Intelligence (GMI) Power Project Database, approximately 179 renewable energy power projects, valued at roughly $25 billion, are under development in Mexico. These include wind and solar facilities. Subscribers to the GMI Power Project Database can click here for a list of detailed project reports.
The Mexican president said his effort was to keep electricity affordable and to preserve CFE as an important national institution.
But U.S. business groups and the U.S. Trade Representative warned Mexico that adopting López Obrador's constitutional change would violate a major multilateral trade agreement, increase electricity prices, and undermine efforts to lower greenhouse gas emissions in order to combat global climate change.
Earlier this year, Neil Herrington, the U.S. Chamber of Commerce's senior vice president of the Americas, said: "The electricity reform bill presented in Mexico's Congress ... is deeply troubling. Such drastic changes would open the door for the reinstatement of a monopoly in the electricity sector and, we believe, would directly contravene Mexico's commitments under the U.S.-Mexico-Canada Agreement (USMCA). Further, these changes would significantly raise the cost of electricity and limit access to clean energy for Mexico's citizens. Unfortunately, this move is the latest in a pattern of troubling decisions taken by the Government of Mexico that have undermined the confidence of foreign investors in the country at the precise moment enhanced foreign direct investment in Mexico is needed more than ever."
A report from the French Press Agency quoted U.S. Trade Representative Katherine Tai as saying, prior to the vote, that "Mexico's energy policies damage the environment, U.S. business and investor interests in multiple sectors, and hamper joint efforts to mitigate climate change."
And a 2021 study from the U.S. Department of Energy's National Renewable Energy Laboratory estimated that López Obrador's measure could increase Mexico's carbon emissions by between 26% and 65%.
In response to the vote on the electricity measure, López Obrador's party, which holds a majority in both houses of the Mexican legislature, on April 19 passed a law nationalizing Mexico's nascent lithium industry. For more on that, see April 21, 2022, article - Resource Nationalism Takes Mexico's Lithium.
Although Mexico's Congress shot down the president's effort to roll back electricity market liberalization, there's plenty of uncertainty hanging over that nation's electricity industry. Last year, Mexico's Congress passed a law that gives preference to CFE generators in dispatching electricity, which has triggered hundreds of lawsuits, according to a tally from Fitch Ratings Incorporated. That 2021 law also canceled all private power contracts and permits, though those permits and contracts could not be canceled until after all the lawsuits have been decided or settled.
After the failure to amend the Mexican constitution, Mexican energy expert Adrian Duhalt, a postdoctoral fellow in energy studies at Rice University's Baker Institute, told Industrial Info: "The most important risk or uncertainty for those electric firms operating in Mexico is the fact that his government may seek to renegotiate or even terminate long-term power purchase contracts. And in that sense, two scenarios may take place: firms may accept to sit down with the government and negotiate, or they could decide to solve matters via legal disputes."
Duhalt was referring to a law, passed by the Mexican Congress last year and recently upheld by the Mexican Supreme Court, that amended the Mexican Electric Industry Law, known as LIE. By giving CFE generators preference in dispatch, and by giving power purchasers the right to cancel private power contracts and permits, the LIE amendment, which passed by a simple majority, provides CFE many of the same advantages as what López Obrador was trying to enshrine in Mexico's constitution.
"For the time being, power operators holding contracts worth billions of dollars in investment are confronting a complex environment in Mexico," Duhalt continued. "Some may even consider the market 'hostile,' as President López Obrador is determined, in the name of energy security, to put his nationalistic approach first."
Duhalt recommended that non-Mexican companies seeking to participate in the Mexican electric power or energy market to become more "familiar with and assess the regulatory and political environment of Mexico. In the end, the rules of the game are not the only factor shaping the business environment in Mexico. The political side of the power sector also is a force to reckon with. Do your homework: Reach out to policy makers and government officials to find out what sort of opportunities the country´s power sector has to offer."
Duhalt continued: "Given the determination of the Mexican president and the fact that he can persuade power firms to negotiate, I do not anticipate any move toward nationalization in the electric or oil and gas market. Oil and gas contracts awarded during the previous administration have been respected. It seems to me that the president was aware that his power bill was not going to pass Congress because his political coalition did not have enough votes (to amend the constitution). I see the 'nationalization' of lithium reserves as an anticipated move that looks like as consolation prize for his political base."
The Fitch bond-rating agency said overseas energy companies faced "ongoing regulatory uncertainty" in Mexico. The agency estimated that Mexico's electricity sector needs about $150 billion in new investment over the next 15 years to meet demand. The agency suggested measures like the 2021 revision to the nation's electric law and López Obrador's effort to change the Mexican constitution would drive foreign investment away.
Although Mexico's Supreme Court found the LIE amendments were not unconstitutional earlier this month, Fitch and other observers said Mexico's lower courts were effectively on their own in deciding the hundreds of lawsuits triggered by the 2021 change to LIE.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
